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Following the recent announcement by the German government of the forthcoming closure of all nuclear plants by 2022 (see Merkel's nuclear exit), a new step has been taken today with a series of announcements to support renewable energy, including a specific financing programme to develop the offshore wind industry on a large scale (see here, in German only for now) via public development bank KfW.

This programme does two very smart things:

This is part of my Wind power series.
The usual disclosure is more important than ever in this case:  I advise wind developers on their financing needs, in particular for offshore wind projects, so this particular item will have a large impact on my work (though I'd note that, by making deals easier, it could arguably be said that it makes my job of putting financings in place somewhat less valuable...)

  • it provides scale.
    Depending on the options selected, KfW can provide up to €700 million in funding (and half of that in risk participation) per project. Given that one of the big difficulties in today's banking markets is the lack of underwriting capacity (ie the inability by individual banks to commit large volumes to a transaction when it's signed, which they syndicate to other banks at a later stage), large projects require large numbers of banks to find the require level of funding. With a limited number of banks having experience in offshore wind so far, this makes these deals, which are structurally large (a 400MW wind farm, the typical size in Germany, costs something in the €1-1.5 billion range to get built), almost impossible to finance today. Having an institution able to provide close to half of the funds required makes the task suddenly more manageable, and will make a real difference in the next 1-3 years, before the market becomes mature enough and large enough for deals to happen without them;
  • it provides cheap funding.
    KfW, being a public entity, benefits from the very low cost of borrowing of the German government, and the programme specifically makes it possible for it to fund projects passing through its low rate of funding. It may even provide funding to commercial banks (which bear the risk via contractual guarantees towards KfW) in addition to its own tranche, further reducing the overall cost of debt for the project. I've written enough on ET about the fundamental importance of the cost of money for the determination of the final cost of power for offshore wind not to underline how important news this is. In this case, it won't change the cost of offshore wind electricity for consumers (set by law at 15c€/kWh for 12 years, under the existing feed-in regime), but it will make that feed-in tariff, which is relatively low (as it is not inflated over time) profitable for a larger number of projects and thus ensure that the expected volumes do get built.

Of course, KfW will require commercial banks to be involved alongside itself to ensure that transactions are done on "realistic" commercial terms, so the programme will officially not distort markets, but that cheap funding is a very real political choice nevertheless. This is a very clear case of a country "walking the walk" in its policy choices, and it makes the goal of building 25 GW by 2020 all the more realistic.

See this article from the WSJ on the rest of the measures:

Germany Moves Forward on Nuclear Exit

BERLIN--Germany's cabinet Monday approved a series of laws to make possible an exit from atomic energy by the end of 2022, including measures for a massive increase of onshore and offshore wind power, the accelerated expansion of the electricity grid, and more gas-fired generation capacity.

(...)

Wind is a key part of the equation as Germany targets to boost the share of its electricity consumption met by renewable power from 17% to 35% by 2020, 50% by 2030, and 80% by 2050.

To kick-start the construction of more offshore wind farms, Germany's KfW development bank will finance 10 wind farms with a combined €5 billion. The government also has decided to delay the start of an annual lowering of subsidies for offshore wind power to 2018 from 2015.

The government plans to facilitate the upgrading--or repowering as it is known--of existing wind farms with more potent and efficient turbines, Mr. Ramsauer said.

Another law seeks to accelerate the construction of more transmission lines to bring electricity from onshore and offshore wind farms in northern Germany to industrial centers in the south.

The government amended the planned annual rate of decrease in the size of subsidies for onshore wind power to 1.5% instead of 2%.

But Mr. Roettgen insisted that subsidies must be phased out eventually. "We want and will introduce renewable energy to the market," he said.

The government also decided to scrap further cuts in solar-energy subsidies that it had considered. Instead, it will maintain a system of reducing solar subsidies by a base rate of 9% each year, to be complemented by a variable percentage rate, depending on how much new generation capacity is installed each year.

The principle here is that projects built in a given year get a fixed price for their electricity for 15 years. That price goes down over time (ie projects built later get a lower fixed price for their 15-year span) in a predictable way which is supposed to match as closely as possible the evolution of technology - so there are no windfall effects, but also good medium term certainty for the industry.

As a result, German now has several hundred thousand people working in the renewable energy industry, and is well on its way to having a large chunk of its electricity coming from renewables.

The official goal is 25 GW of offshore wind by 2020; current nukes produce about 150 TWh/y; 25GW of offshore wind will produce 100 TWh/y, and nothing will prevent more being built after 2020 - so nuclear CAN be replaced by offshore wind in a 10-15-year span.

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