Financing clean energy
Renewables on the fast track? Where we stand on energy transition
The war in Ukraine has exposed Europe’s dependence on Russian commodity exports, forcing international policymakers to push renewable energy. While the conflict in Eastern Europe could indeed accelerate the pace of the energy transition, there are challenges.
Boost for renewables as Germany diversifies its energy supply
It wasn’t exactly news, but the war in Ukraine has highlighted just how much the German economy depends on Russian commodities. In the spring of 2022, Germany relied on imports from Russia for 55 per cent of its gas, 50 per cent of its coal and 35 per cent of its oil consumption, according to Robert Habeck, Federal Minister for Economic Affairs. Action is now being taken to reduce this dependency. Making matters worse, the Nord Stream 1 pipeline running under the Baltic Sea was closed for scheduled maintenance in July, with Germany fearing that Russia might not resume the flow of gas after the outage. Even though Russia did initially restart deliveries, there is currently no gas flowing through the pipeline. This ‘perfect storm’ has contributed to further rises in power prices.
In response to this dependence on fossil fuels, the German parliament resolved what became known as the “‘Easter Package’” in early July, including various new laws designed to expedite the expansion of renewable energy. In addition, Germany wants 80% of its gross electricity consumption to be generated from clean sources by 2030. To put this into perspective, renewables accounted for 41.1% of the country’s electricity consumption in 2021.
European Union stepping up efforts for clean energy
Germany is not alone in its efforts. The European Union is also speeding up its energy transition, granting permits faster for wind and solar farms in a push to achieve higher levels of renewable energy production in EU countries. In May 2022, the EU Commission presented its Solar Rooftop Initiative in a bid to have more solar panels installed on existing and new buildings.
Looking beyond Europe, the US has made a vast buildout of renewable energy a priority. According to information provided by the U.S. Energy Information Administration, the share of wind power has risen particularly strongly, by more than 300% between 2010 and 2020.
Lengthy procedures for permits are hampering green energy projects
The trajectory set for the energy transition is ambitious, and there are challenges that forestall an acceleration. Thus, approval procedures are sometimes very lengthy: According to the European Union, it can take up to ten years for a wind, hydro or solar power project to be delivered. According to WindEurope, an industry association, the European Union installed a meagre 11 GW of new wind capacity in 2021. And they add, between 2022 and 2026, 18 GW in new installations are planned per year, but it would take 30 GW per year to meet the EU renewable energy target by 2030: “In Europe, nowhere near the number of new wind farms are being approved as are needed,” the association complains.
Further blockages on the road to renewable energy
Adding to this are crises such as the coronavirus pandemic and the war in Ukraine, both having a massive impact on global supply chains. Trade disputes, such as recently seen between the US and China, make it difficult for producers of renewable energy equipment to import all the materials they need. Even if commodities and raw materials can be imported, their prices have skyrocketed – not only since the Ukraine war, even though the conflict has driven them up even further. This applies to oil, gas and coal, but also to aluminium and steel, and thus to materials required for the construction of wind and solar farms. Transport and logistics costs have also increased.
What this means for the buildout of renewable energy
“We have to be careful that our beautiful energy transition doesn’t fail due to a lack of raw materials,” says the German Economic Institute (IW), as significantly higher materials prices and higher freight costs have triggered a surge in overall project costs, including those related to renewable energy. Investments in renewables are still paying off though, since energy from renewable sources is still cheaper than traditional energy.
Tim Koenemann, Head of Commerzbank’s Center of Competence (CoC) Energy, explains what the energy transition means for the CoC’s business:
Mr Koenemann, what do the developments we have outlined mean for the CoC Energy?
Many of our clients are contacting us to request an update of their financing’s terms. With costs on an upward trajectory, and the option to re-negotiate power purchase agreements, we have to take a fresh look at planned projects and make adjustments to their financing structures.
How do you respond to these challenges?
Our clients are very experienced, and are located across the renewable energy value chain. Collaborating closely with them has allowed us to gain a good understanding of the structural challenges, and to develop a toolbox that contains the right instrument for every challenge – from hedging interest rates at an early stage to accounting for higher market price expectations when determining debt capacity, through to financing structures based on private-sector power purchase agreements.
How does Commerzbank prepare for further change?
We have bundled our competences and bring decades of markets and risk management experience to the table. This has allowed us to ensure very fast lending procedures that offer real solutions, even for complex transactions. We want to double our project finance portfolio over the next few years. And we are broadening our focus beyond wind and solar projects to include neighbouring technologies that help facilitate the energy transition, such as the production of green hydrogen or battery storage systems.