In the early days of the wind energy industry, a lot of industry discussion was riddled with umlauts and contained phrases like 'die größte und leistungsfähigste Windenergieanlage der Welt.'

So feverish was the German appetite for renewable energy; that by 2002, the Bundesrepublik accounted for nearly half of global demand for wind turbines. By the end of 2006, the country had more than 20GW of installed capacity.

Enertrag, one of Germany's largest independent wind developers and power producers, has a stake in that capacity and continues to be active both domestically and abroad.

The company has built up a wind portfolio with a rated capacity of more than 600MW and has 393 turbines either operating or currently under construction.

Via its O&M subsidiary, Enertrag is maintaining these turbines and more than 620 additional units from manufacturer DeWind.

As the company heads into 2008 (with its turbines in check), IJ reporter John Kjorstad looks back at some of the company's big transactions in 2007.

PG 1 financing

Earlier this year, Enertrag Structured Finance - the company's dedicated financial advisor - secured project and acquisition funding for six wind farms in Germany.

The 92.1MW portfolio, which includes three greenfield projects as well as three existing assets, is backed with mezzanine capital from Impax New Energy Investors and senior debt underwritten by BNP Paribas.

'Enertrag is pleased to have entered into this innovative transaction which combines both project and acquisition finance elements in one portfolio structure under the roof of one SPV and employing only one set of facilities,' said ESF chief executive Detlev Hartmann.

Project and acquisition capex for the portfolio - known as 'PG 1' - totalled €98.5 million and is supported by a €101 million financing package.

This includes:

• €61.2 million first lien A tranche (KfW-ERP)
• €21.3 million first lien B tranche
• €8 million equity from Enertrag shareholders
• €6 million 'equity substitution loan' from Impax
• €4.5 million in debt service reserve and working capital facilities

'The Impax mezz debt element is instrumental to our build-own-operate IPP strategy, enabling us to maintain ownership of our assets in the long run,' said Hartmann. 'By carefully structuring this well diversified asset portfolio, we are proud to have achieved very satisfactory terms regarding tenor for ourselves as well as delivering a superior investment product for the secondary banking market.'

Impax Asset Management structured the mezzanine debt provided by the Impax New Energy Investors fund.

'We wanted to invest in a diversified set of wind project sites managed by a quality operator that gave us comfort to provide what is essentially a subordinated profit participation note,' said Peter van Egmond Rossbach, director for investments at Impax.

The mezzanine debt is paid back from the project and has a term which runs to 2015. It was largely provided to fund a portion of the portfolio acquisition prior to financial close on the senior construction debt.

Senior debt was solely arranged and underwritten by BNP Paribas. It has a tenor of 18 years post completion and will be utilized as a construction, acquisition and term loan.

Syndication is expected in Q1 2008.

The lien A tranche is drawn from a pool of governmental funds and managed by KfW under its Environmental Protection and Energy Saving Programme. KfW-ERP funds are common in German wind finance and basically operate as a refinancing source for banks which have underwritten loans to renewable energy investors.

The funds are roughly 25-50bp cheaper than funds drawn from the capital markets. However, it is not a direct subsidy or grant as default risk and credit analysis remains entirely with the underwriting bank.

For its share, BNP has underwritten €87 million of debt comprising:

• €82.5 million term loan
• €2 million working capital facility
• €2.5 million debt service reserve facility

Watson, Farley & Williams acted as legal counsel to BNP Paribas. Technical due diligence was performed by Lahmeyer International.

Enertrag was advised by:

• Becker, Buttner, Held (legal due diligence)
• Deutsche WindGuard (wind resource advisor)
• ESF (financial advisor)
• Mazars & Hemmelrath (tax)
• Schott, Loeschner, Wilke (legal corporate)
• WindQuants (quantitative analysis)

Impax was advised by Hogan, Hartson, Raue for legal and the Danish research institute Risø on wind.

PG 1 assets

PG 1 is spread across four German wind index regions and is technically diversified with six different turbine types from three separate manufacturers.

The portfolio consists of 27 turbines currently under construction. It also includes separate financial portfolio investments for majority stakes in three existing wind farms.

The investment assets are located at three different sites (see map below), and include:

• Bütow wind farm, 22 DeWind D4/48 turbines, commissioned 1999
• Quenstedt wind farm, 8 GE 1.5MW turbines, commissioned 2000
• Weenermoor wind farm, 8 Enercon E66/15.66 turbines, commissioned 1998

The operating assets - for which Enertrag serves as O&M, procurement and administrative services provider - all comprise 'strong wind regimes' and have a track record of more than eight years of operation.

The largest greenfield project in the mix is the 44MW Wolfsmoor wind farm, which employs 22 Enercon E70-4 turbines rated at 2MW each. It is located near Brüssow in the north east corner of Germany.

The other five turbines under construction are sited in the federal state of Saxony-Anhalt, near Halle and Leipzig. Bobbau III consists of 3 Enercon E70 turbines, rated at 2.3MW each, and Roitzsch III employs 2 DeWind D8 turbines rated at 2MW each.

Enertrag developed the greenfield projects under a build-own-operate structure, with different affiliates serving as EPC contractor, grid operator, O&M provider, and procurement and service provider.

Other Enertrag activity in 2007

The PG 1 financing compliments other deals that Enertrag has completed this year.

The company - formed to promote the development of wind projects throughout Europe - has also closed a pair of transactions with German lender NordLB.

In early summer, the pair closed a €31 million deal to fund the 23.8MW Suderland wind farm [Projects Database] in northern Germany. That project had a capex of €29 million and was supported by a €31 million financing package (IJ News 15 June 2007).

It was followed by a second transaction that closed this fall - funding the 24MW Schonfeld wind farm in Brandenburg, Germany. Schonfeld is located near the Polish border and has an investment capex of €47 million (IJ News 1 November 2007).

Though the projects are roughly the same size in capacity, there is an €18 million difference in capex. This results from higher towers and grid infrastructure costs.

Schonfeld towers soar to a dizzying 138 metres while Suderland's only go to 64 metres. Enertrag said higher towers result in 40 per cent higher turbine capex, but also increase mean wind speed from 6.7m/s to 7.4m/s.

Looking ahead, Enertrag Structured Finance has also arranged two semi-corporate credit facilities to fund advance payments and secure turbine delivery for six German wind farms in its 2008 construction portfolio.

These loans will fund supply agreements - totalling 71.5MW - concluded with Enercon, GE, and Nordex.

The first facility closed last spring and comprises a €10 million revolver underwritten by Bremer Landesbank. The debt can be utilized for both general project development purposes and turbine prepayments.

The second loan - an €11.7 million revolving credit facility - is 'project-specific' and was recently underwritten by Deutsche Kreditbank.

Outlook: German Onshore Wind

Since 2002, when Germany had a grip on the international turbine market, supply has tightened and manufacturers have expanded to serve other regions.

Developers eager to exploit abundant greenfield sites in countries like Spain and the US have snatched up turbines faster than they can be built. As a result, manufacturers have leveraged their position on contracts and companies like Enertrag have had to take out loans a year or more in advance to guarantee supply.

At the same time, onshore wind in Germany has matured as many of the best project sites have already been developed. According to one source, the 'low-hanging fruit' has been picked and 'the party is over' for small developers.

Dr Wolfgang Pfaffenberger, an adjunct professor of economics (European Utility Management) at Jacobs University in Bremen agrees. He told IJ News that Germany has limited physical space and most good sites with acceptable wind speeds are already taken.

Grid access is a separate issue. Pfaffenberger said there are local situations where the grid has difficulty handling strong wind conditions. Balancing energy flows and keeping the grid stable requires a lot of over capacity - which the German network currently has.

However, some regions have had problems and the German public in general has been resistant to building new power lines - squeezing network operators which are legally required to take power from developed wind farms.

Enertrag said it is well positioned to avoid these pitfalls. The company has sites in the pipeline and, while some of the smaller players are hampered by lack of grid access, Enertrag owns a local grid extension in north east Germany.

On the whole, the company said there is still room to develop GWs of more onshore wind in Germany. In addition, there is great potential for repowering projects with bigger turbines. However, in terms of permitting, repowering old sites will need to start from scratch.

For the moment, Enertrag said it is not yet considering repowering.

'One of the critical issues which the German market is currently facing, is the linear annual digression of feed-in tariffs for onshore wind.' said Alexander Boensch, manger at ESF. 'While in countries like France and Spain tariff formulas include mechanisms to adjust prices for general inflation, the German tariff decreases annually by 2 per cent for all new builds.'

'Given the strong increase in market prices for copper (cables) and wind turbines, the German government jeopardizes further onshore installation development in the medium term, if the pricing mechanism is not changed to reflect the changed market conditions. It simply becomes more profitable to invest abroad.'

E&Y Renewable Energy Country Attractiveness Indices

Germany installed 2,233MW of new wind capacity in 2006, second only to the US.

Its total installed capacity broke the 20GW mark (20,622MW) and it has a striking 9GW lead on Spain and the US.

Recently, Germany ranked just behind the US in Ernst & Young's Renewable Energy Country Attractiveness Indices (Q3 2007).

The country moved into second - from fifth in the Q2 report - after the government proposed amendments to the Renewable Energy Act and increases to its renewable energy targets.

Amendments to the Renewable Energy Sources Act will take effect from 2009 and effectively cut the solar power tariff in favour of greater support for offshore wind.

The point at which premium tariffs for offshore wind are reduced has consequently been pushed back from 2008 to 2014 and the environment minister proposed that the annual decline in wind tariffs be cut to 1 per cent from 2 per cent.

Government also moved to scrap the current specification that grid costs will be suffered by the grid operators if construction begins before 2012.

On renewable targets, E&Y said Germany has exceeded the government's goal of generating 12.5 per cent of electricity from renewables by 2010 and now aims to provide 45 per cent of total power generation from renewable energy by 2030.

The other key factor moving German renewables forward is offshore wind. While the potential is enormous, the technology has been slow to develop and costs - including transmission infrastructure - are much higher than initially thought. Test projects are in the works and the government still holds great hope in research and development.

These issues are essentially the rough seas of uncharted water. Other countries have caught on and set a similar course; but while the rest of the world plays catch up, investment continues and Germany is mapping a sustainable future.