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Global Capital, IMF editions, October 2015

In early September, a cluster of German ministers, financiers and engineers gathered to celebrate the official opening of the Butendiek offshore wind farm, a Eu1.3 billion 80-turbine project in the German North Sea. Former minister for the environment Jürgen Trittin, who still serves in the Bundestag, told the gathering: “We did not take the decision to approve the project lightly at the time. But if I look at it today, I think it was the right decision. A 288MW power station supplying electricity with no greenhouse gases or nuclear waste – those are grounds for celebration.”

In the audience was the head of KfW IPEX-Bank, the export and project finance arm of KfW, enjoying the culmination of a lot of work – more than a decade of work, in fact. “He was there for the official opening, but the first contact for this project was in 2003,” says Karl-Ludwig Brockmann, in charge of sustainability at KfW Bankengruppe. In the intervening period, offshore wind power has gone from something of a pipedream to a sophisticated and entrenched sector. “It was a very new industry then, but it’s mature now,” says Brockmann. “There is familiarity with the techniques, familiarity with dealing with the bureaucracy; it’s a long curve, but we have already stepped forward.”

To meet Germany’s bold ambitions, they will need to keep doing so. Germans speak often of energy turnaround, or energy transition, a translation of the term Energiewende; it refers to a national policy to move to an energy portfolio within which renewable energy, energy efficiency and sustainable development are the dominant priorities. The term actually dates from 1980 but the key policy document was published by the German government in September 2010 and given legislative support the following year. Among its many ambitious targets are for renewable energy to account for 18% of gross energy consumption by 2020 and 60% by 2050; and 35% of total power generation by 2020.

While there are challenges on the energy efficiency side (see separate section, which also includes discussion of KfW’s green bond programme), on the generation side there is reason to believe Germany can meet those ambitions. “The development of renewables is on track,” says Brockmann. “Some would say it’s even too far ahead, because we need grid expansion in order to transport the electricity from the location of production – predominantly north and east, where the wind blows – to consumption, which is often in the western and southern parts of Germany. One major challenge in the energy turnaround at present is to bring the grid infrastructure in line with the expansion of capacity.” Germany is surely the only place where one can say there’s more renewable energy coming on stream than there is a grid to accept it.

Wind has been the keystone of KfW’s attempts to bring finance into renewable energy. It runs a promotional programme through which KfW takes the risks in offshore wind farms. At this point it’s worth noting the significant differences between onshore and offshore wind farms. “The onshore market is proven, the most low-cost technology for producing electricity from renewables in Germany, and is quite an established market now, so we see a lot of wind farms being financed without KfW support,” says Brockmann. “Wind offshore is where it gets interesting. We take big tickets and are covered by the German government so we have a guarantee behind us – it can be as much as Eu500 million for one ticket.” The presence of KfW and the guarantee has proven effective, helping to finance the first offshore parks in Germany. “Recently, we saw parks financed without this guarantee, so maybe in three or four years only a few investors will need this programme anymore because, like onshore, it has become more normal business.”


KfW’s presence is also important because offshore wind is not straightforward in Germany, particularly from an engineering perspective; whereas offshore wind farms in the UK are typically built in 10 metres of sea depth, in Germany they can be 40 metres. “This makes quite a difference, and that’s the reason this is risky, and why a guarantee programme is a good approach.” One also needs to be able to think quite far ahead: Butendiek’s 12-year genesis is unusual, but nevertheless a period of years between first contact and financial closure is commonplace, and that’s before the engineering and building begins.


KfW is active in other areas of renewable energy too. Brockmann says that bio-energy is “a mixed blessing”. On one hand, it is baseload energy that can be run through the year, rather than just when the sun’s out or the wind is blowing, “but the other side is that there is a conflict in the protection of nature and food production. The potential is limited for biogas, and perhaps much of it is already used.”


Solar, on the other hand, “has very high potential,” though at this stage its cost-effectiveness is second to onshore wind. It has, Brockmann says, high acceptance in the population – nobody complains about a solar panel on the roof – and if there is further cost reduction in production, it can play more of a role.

Whichever method, “renewables in general will hardly reach a situation in the next few years where they can live without any subsidies,” says Brockmann, and this is particularly acute at a time of low electricity prices caused by the oil price, since on a commercial basis it makes alternative energy too low-yielding to support the investment it needs. Germany’s EEG support scheme guarantees a price that the investor in renewable energy will enjoy regardless; without it, little would be financed.




Africa lends itself well to renewable energy.


“Africa is endowed with some of the best clean energy resources in the world,” says Joao Duarte Cunha, chief climate finance officer at the African Development Bank in Abidjan. “It’s a high potential region”, in a number of fields, from solar in north, west and southern Africa, to wind, hydro and geothermal opportunities in most of eastern Africa.


It’s not an easy place to get projects underway, though, for a number of reasons, from cost to ease of business. “You can bring in many projects, lots of capital, and different types of financing, but if the enabling environment is not in place there is only so much you can do,” Cunha says. Many renewable energy projects require an investor to take a view over 20 years or more; they have to be convinced that the project is bankable and will generate enough predictable cashflow to meet its debt or payment obligations over that timeframe. This security is often lacking in African countries.


The African Development Bank’s mandate is not just to secure growth for Africa but green, sustainable, high-quality growth. “That’s something we haven’t seen in Africa in recent years,” Cunha says. “There are good macro numbers, but they are not broad-based or inclusive.” Clean energy fits well with this mandate, not merely because of the environmental benefits but mostly because it improves security and diversity of supply, as well as the availability of power to all, thus galvanising local economies.


An example can be found in the Ouarzazate solar power plant in Morocco. Perched on the edge of the Sahara, Morocco is a natural place for solar (Ernst & Young says the second most attractive country in the world in this respect), and this plant will eventually have capacity of 500MW, and will be the largest in the world using concentrated solar power technology. Morocco needs projects like this: prior to its construction, it imported 97% of its energy needs. Bringing a plant like this onstream through solar energy will avoid the emission of 700,000 tonnes of carbon dioxide per year for 25 years, says the AfDB, while also driving a local industry nearby.


It is, though, the sort of project that would never get off the ground without assistance. “It would have been difficult to finance in pure commercial terms,” says Cunha. “It would instead have been picked up by the government and ultimately paid for by end consumers through higher tariffs.” The technology “comes with a high price tag attached to it,” he adds. So AfDB financed the first and second phases of the works with Eu268 million, plus two concessional loans of Eu180 million through its Clean Technology Fund at “terms you would not find in the market otherwise.”


This financing “made it competitive with other technologies,” Cunha says. “This project was a case of demonstrating the technology at scale, and through that, opening it up for more projects that could eventually come at a lower cost.” The African Development Bank is now looking at using the same technology in South Africa and Egypt, among other places.


The African Development Bank set up its own green bond programme in late 2013, using the same ‘use of proceeds’ model as other multilaterals, where projects are selected in advance to receive funds from the bonds. The inaugural deal raised US$500 million, and two have followed in 2014 worth SEK1 billion apiece. Anthony Ruschpler, senior treasury officer at the African Development Bank in Tunis, says: “We have managed to build a substantial pipeline on the project side to allow us to consider another US$500 million before year-end. This is in line with our commitment to be a regular issuer in the green bond market.”


The AfDB only considers projects if they are 100% green. “Projects need to be qualified in full as promoting either low-carbon or climate resilient development. So if a component cannot be qualified as green, the project wouldn’t be eligible for inclusion into our green bond project portfolio,” says Ruschpler. “This means we take more time to develop our pipeline of eligible green projects, but that said, we have built a sizable portfolio for our upcoming transaction.”


While it would be hard to say that Ouarzazate and similar projects would not have gone ahead through conventional funding, Ruschpler notes that green bonds have given those underlying projects greater visibility. ”That’s quite important for the development of our project portfolio within the AfDB and also raising awareness across the green bond market.” He says that more green project bonds or securitized bonds would be “a great next step to bring in new green financing,” and says “investors are increasingly looking for direct exposure to projects.”




Nordic Investment Bank is a supranational unusual in the fact that environmentalism is explicitly stated in one of its twin mandates (the other being competitiveness). What does that mean? On the environmental side, “It means that we can only finance projects that enhance the environment,” says Lars Eibeholm. “We can’t just lend to a corporate for balance sheet purposes or working capital. We can’t lend money for a government for their budget, or lend to a municipality for general purposes. There needs to be an environmental investment.”


Unsurprisingly, NIB is one of the most prolific of all green bond issuers, and has launched seven to date, but in fact has been financing environmental projects through its regular bonds for much longer. “But we had been financing that through normal bonds. In 2011 there was specific investor demand for buying green bonds linked to our investments, so the market has developed more or less from zero to where we are today since that point.” Since as a supranational it had always had a framework for issuance under an environmental mandate anyway, shifting to labelled green bonds was not a major challenge.


By far the lion’s share of NIB’s deployed capital from its environmental bonds has been to renewable energy – about 66% to date, although it also finances green buildings, energy efficiency, waste and water treatment. (“What we have decided not to finance with green bonds is climate adaptation,” he says, “because we have put strict criteria around our green bonds to avoid reputation risk, and you can call almost anything climate adaptation unless it’s very specifically defined.”)


One would think that renewable energy, with its clear visuals of wind farms and solar panels, would be the most straightforward area to quantify to green investors. “You would think so, but actually it’s not,” says Eibeholm. “The whole idea of renewable energy is that you have to trust that the investment is crowding out another form of energy, because otherwise the impact is not that big.” The problem is, if NIB funds a wind project in Norway, that doesn’t actually make a huge difference in any quantifiable sense because so much of Norway’s power comes from hydro, which is considered environmentally positive anyway. “They already have a lot of renewable energy in their system. A wind energy project might be very good in Norway, but our reporting would show very little impact. Put the project in Denmark, though, and it would be different.”


This helps to explain why issues around impact reporting are not as straightforward as they might at first appear. “We need to develop that, because if the project is good in Norway, and connected to a grid where coal power electricity would be cancelled out, then the impact is as good there as if it was somewhere else. But as it is today, rules are completely unclear: the impact of NIB bonds from a renewable energy project might be lower compared to it happening in Europe. Investors might think: I should buy a green bond in another country, because the impact is much bigger there, but that’s not the truth.”


He thinks supranationals could lead the development of agreed standards on disclosure and impact reporting, “but clearly you need a third party coming from outside that could take responsibility for this.”


How different has the investor base been between green and non-green? “You can say that the colour of the money is the same. But I would say it is a different type of investor,” says Eibeholm. “On Monday I was visiting green investors and it’s a completely different dialogue” than with conventional. “In a normal investor meeting you will discuss your balance sheet, what we are issuing, what is our yield. Green investors are looking at the exact processes around the green bond, and making sure the purpose of the funds.”


While this has not yet made any difference to pricing, “in future it may provide a funding advantage. If we think ahead there will be more investor demand.” He thinks there’s a parallel in banks launching senior unsecured bonds versus covered bonds; covered bonds are useful but undergo a large amount of additional regulation and analysis. Similarly, “before we can claim a higher price on green bonds, we need to demonstrate the positive impact on our balance sheet.” Could we foresee a day eventually when green bonds no longer rank pari passu with other instruments on the balance sheet?


While many investors bemoan a lack of investable projects, in early September NIB had approximately Eu250 million-worth waiting for financing. There is plenty to do.

Chris Wright
Chris Wright
Chris is a journalist specialising in business and financial journalism across Asia, Australia and the Middle East. He is Asia editor for Euromoney magazine and has written for publications including the Financial Times, Institutional Investor, Forbes, Asiamoney, the Australian Financial Review, Discovery Channel Magazine, Qantas: The Australian Way and BRW. He is the author of No More Worlds to Conquer, published by HarperCollins.

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