The Future of Energy: Microgeneration in Germany (Part 3) – how is it financed?

Many businesses and individual homeowners, as well as asset managers, have for years now sought to replace a grid-based energy supply with their own and thus independent energy source. This trend continues and was fuelled by higher energy prices due to geopolitical events.

As demand for energy from independent sources grows, understanding the financing options and investment opportunities available becomes crucial for stakeholders looking to invest in this sector.

While the coalition agreement of the new German government emphasizes the vision of renewable energies being able to finance themselves, the German government currently still sees the need for government support for a variety of renewable energy projects. The underlying assumption is that these projects would not be realized without government support, as it would otherwise not be commercially viable.

German as well as EU law provides incentives and subsidies for investment in microgeneration. These include grants, low-interest loans, feed-in tariffs, market premiums and tax incentives. For a closer look at how the German regulatory framework promotes microgeneration projects, please refer to part 2 of this series. In many cases the governmental subsidies seem justified as long as amortization periods still represent a significant barrier to investment, in particular in times when the respective energy prices are fairly low.

In the microgeneration space, often other incentives than return on investment also play a role in the investment decision. Individual homeowners want to become independent or at least less dependent from grid-supplied energy, as it provides them with more long-term stability regarding energy prices and this gives peace of mind. For individuals the question of the availability of finance is often at least as important as the question of when their investment will be paid off.

Some individual homeowners in Germany also try solving the issue of financing by pooling their means and resources by participating in community financing models, such as energy cooperatives or crowdfunding platforms.

Certain suppliers of the required installations for the local generation of energy offer financing together with the installation of the necessary equipment, such as solar rooftop installations, batteries, wall boxes and smart meters. The suppliers then refinance themselves through banks or institutional investors, e.g. by way of an asset-backed facility.

Another popular method currently is a refinancing through a securitization. In this case amounts payable under leases, loans and purchases against customers are bundled as pools of customer receivables and used to secure collateralized securities. These securitized products can be sold to institutional finance and equity investors, who receive periodic returns. The cash flow generated by the supplier can be used to finance further microgeneration projects.

Green bonds targeted specifically at environmental projects constitute another option for refinancing microgeneration. Green bonds are like conventional bonds, but with the distinguishing feature that the issuers invest solely in climate-friendly and sustainable projects. Investors receive interest payments during and the principal amount at the end of the loan’s term in return.

It's clear that the energy produced by microgeneration is very often a retail product while the means of funding those projects has found its way into the world of corporate and finance and generated a new asset class of financing and equity transactions. Hogan Lovells has played a crucial role in many of these first-of-its-kind transactions and continues to do so. Talk to us if you would like to find out more about it.

Authored by Torsten Rosenboom.