Germany plans to raise €50bn for energy transition fund

The German Association of Energy and Water Industries (BDEW) is joining forces with the German Association of Municipal Utilities and Enterprises (VKU) to launch an energy transition fund aimed at raising between €30-50bn from institutional investors.

The initiative, which is backed by consulting firm Deloitte, is aimed at offering a key building block to fund the German energy transition. Investments in the German energy transition have so far been predominantly financed through debt issuance, a trend which over time could have an adverse impact on equity capital ratios of utilities firms, BDEW said. By 2035, Germany requires €1.2trn in investments to fund its transition to a low-carbon economy, BDEW predicts.

Many German municipal utilities firms are currently rated BBB or BBB- by rating agencies, in part due to their reliance on credit to fund investments in the energy transition. European credit rating agency Scope anticipates that over the next two years, CAPEX for the largest European utilities firms is on track to increase by 8.4% per annum due to increased investments in the energy transition.

By raising cash from institutional investors, the initiative could help bring down equity capital ratios at German municipal energy firms and, in turn, improve their standing as credit issuers, the Association explained. The new fund will be SFDR compliant and will be classed as an Article 8 fund. Capital will be raised through a combination of private equity investments, profit participation rights (Genussrechte), and hybrid bond investments focused on preserving the initial ownership structure of the underlying businesses, a working paper on the proposed fund launch states.

BDEW and VKU aim to receive partial backing from German Federal States and central government to offer more favourable terms to investors. This could consist, for example, of a First Loss Tranche, whereby the authorities would cover some of the losses incurred at the project development stage, the associations propose. In addition, the fund could offer long-dated income streams to institutional investors, VKU’s managing director Ingbert Liebing stressed.

"Whether the energy transition makes noticeable progress will be decided locally in the municipalities. However, even very healthy and capable municipal utilities will hardly be able to shoulder the high investments they need to make in a very short period of time on their own. Additionally, we must not lose sight of the price burdens on consumers. That is why the Energy Transition Fund is so important. As an additional and complementary financing instrument, it addresses the high equity requirements of energy companies whilst offering an attractive risk-return profile for investors,” he stressed.

The German institutional market is relatively heterogenous compared to its European peers with insurers accounting for the bulk of assets. Being regulated by Solvency II, insurers tend to be cautious about allocating a significant proportion of their holdings to alternatives.