Footing the Bill for Renewable Energy Expansion: Lessons from Germany and China
By Fang Zhang
As China prepares to peak its carbon emission before 2030 and achieve carbon neutrality before 2060 as recently announced by President Xi Jinping and Germany readies its participation in Europe’s plans to become climate neutral by 2050 via $572 billion in stimulus funds, the question of how best to foot the bill to promote new ambitious government targets for renewable energy will be back front and center. Studies show access to finance can be a key barrier to renewables scale up. Momentum for clean energy investment slowed in the aftermath of the 2009 financial crisis and again, more recently as the COVID-19 pandemic wreaked havoc on the global economy. Recent analysis by the International Energy Agency suggests that project delays, supply chain disruptions, and financing challenges will slow the pace of installation of new renewable energy capacity in 2020 compared to 2109.
My research shows that the use of national development banks can play a constructive role in renewable energy finance when paired with well-designed market-based subsidy programs and well-defined government targets such as renewable portfolio standards (RPS). Importantly, this recently published study from Climate Policy Lab shows that funds from public financial institutions taken alone are no salvo. If renewables investors face regulatory deficiencies or poorly designed tariffs, financial losses for both investors and banks alike can slow renewables adoption.
My case study of Germany’s inclusive renewables financing model highlights how Berlin paired national development bank funds with a regulatory framework that leveled the playing field for small and medium size enterprises, tapping already strong political support for renewable energy development at the local level and promoting successful diversified deployment. In comparison, China’s selective approach where its national development bank initially championed large enterprises allowed for much faster deployment of utility-scale projects than in Germany, notably facilitating large-scale wind development. However, early large scale renewables development in China came at the cost of some early economic inefficiencies because offtake for projects and transmission capacity was not guaranteed. More recently, China has instituted important policy reforms that have reduced the incidence of structural curtailment problems and related financial losses.
Banks in Germany mainly fund renewable energy projects via project finance that base lending on projected cash flow for the project and the quality of resource availability. Lending to renewables in China, by contrast, is handled mainly by state-controlled banks who fund other state-owned enterprises (SOEs) via corporate finance, according to my research. Loan issuing in China’s renewables sector often includes collateral requirements such as land or real estate. While both Germany and China utilized large national development banks (NDBs) to get renewables markets off the ground, their approaches to doing so were quite different with correspondingly different outcomes as to the kind of developers who now dominate each market respectively.
Both Germany and China have had hiccups along the way in their efforts to promote renewable energy adoption. Germany’s feed in tariff (FiT) for renewable energy initially offered explicit guaranteed prices above the ongoing wholesale electricity market price and was set on an individual technology basis. Renewable energy also received priority connection into the grid. This element of the market design provided strong support for even the most expensive roof top solar. However, the renewables subsidy policy was criticized in the aftermath of the 2009 financial crisis for rendering German industry uncompetitive with global rivals based on expensive energy input costs. Eventually, policy makers reformed the FiT by replacing it with a more competitive auction system.
In China, the FiT did not include guaranteed off-take or priority access to grid connections. As a result, power generated from Chinese renewable energy projects could be curtailed without compensation, and some wind installations had long wait times to tie-in to transmission systems. Payments through the FiT were often delayed by six months to a year, increasing the financial burden on renewables developers. In the case of China, the early period of renewables development was marred with two major bankruptcies, for example. China has instituted a renewable portfolio standard for power generators in China. This has prompted more SOE power generators to focus on renewable energy deployment. As China has already started to phase out its FiT, the startup of China’s carbon pricing market may provide an alternative fiAs China moves forward to promote renewables beyond the SOE sector, Germany’s experience could offer additional models for future kinds of financing mechanisms and vis-a-versa. In financing renewable energy development KfW utilizes a refinancing mechanism that works through regional commercial banks and cooperative banks, which in effect, decentralizes their financing arrangements and meshes well with Germany’s orientation towards smaller local and cooperative parties. Germany’s social banks also played a key role in early renewable projects. Once the sector got off the ground and costs began to fall, larger commercial banks and other kinds of investors entered the sector. Germany’s national development bank KfW is owned 80% by the federal government and 20% by regional German states.
The structure of how KfW offered its finance led to municipal utilities owned by local governments becoming early adopters of renewable energy projects in Germany in the early 2000s while German individuals and farmers also created cooperatives respectively, giving additional momentum to renewables. But in contrast to China where large SOEs dominate renewable energy market development, Germany’s largest utilities only began investing in renewables significantly after 2010 and still lag participation in the sector. This lack of enthusiasm from the country’s largest utilities would need to be changed through regulation if Germany will be able to reach more ambitious goals for renewable energy. Renewable energy installed capacity of state-owned EnBW was less than 20% in 2015, with RWE barely engaging in renewable energy.
On the flip side, the distinctive role played by KfW in refinancing expenditures of local governments and cooperatives led to a more diversified sector of small and medium size players than currently seen in China where large SOEs were championed by China’s National Development Bank. At some juncture, China will need to consider how to propel distributed energy networks (DERs) into its electricity sector. The pattern established in Germany to allow the national development bank to refinance local initiatives by smaller players might be a useful model as DERs become a more important technology for resilience and use of localized storage solutions in China.
Fang Zhang is currently a postdoctoral scholar at CIERP, The Fletcher School, Tufts University. She finished her dissertation in 2019 at The Fletcher School, Tufts University.