Financing plant combinations

Battery business models are evolving, as the technology shows its worth on more of Europe’s grids. Experts from international law firm Osborne Clarke provide an overview of the legal framework for solar energy and battery storage combinations in Germany from a lender’s perspective.

Issue 09 – 2022

Recently, plant combinations that integrate battery energy storage systems (BESS) into PV plants have been boosted in Germany and are becoming increasingly important due to the volatility of renewable energies.

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Legislation is evolving to make financing green energy more attractive and encourage market participants to report if funds are used for sustainable goals. The European Taxonomy Regulation, the Sustainable Finance Disclosure Regulation, and the envisaged EU Green Bond Standards, as well as many EU Commission initiatives and other standard setters in the field of financing (for example, the Loan Market Association, the Loan Syndications and Trading Association and the International Capital Markets Association) are closing the financing gap.

However, it is not only these general standards that are relevant to lenders and other fund providers. There is also a need to understand the particularities of individual projects, the regulatory regimes that govern them, and the challenge of correct structuring and financing. Each project must be looked at individually.

Green finance

Against a backdrop of rising energy prices, the Russian-Ukraine conflict, the ongoing pandemic, and a worsening climate crisis, the UP Initiative focuses on green finance. How can this sector help address these issues and what needs to be done to achieve positive progress? Discover more here

Recently, plant combinations that integrate battery energy storage systems (BESS) into PV plants have been boosted in Germany by the Innovation Tender Regulation (Innovationsausschreibungsverordnung, InnAusV) and are becoming increasingly important due to the volatility of renewable energies.

Innovation tenders are regulated by the German Renewable Energies Act (EEG) and the InnAusV, both of which have been recently amended. The InnAusV regulates the most important legal provisions and contains legal definitions for plant combinations eligible for innovation tenders.

The EEG is also applicable either explicitly or through a fallback clause. During project financing and contract drafting, the various amendments to both the EEG, InnAusV, and the fallback clause requires a thorough look at each individual project depending on the specific tender date which in general governs applicability of the respective version of the InnAusV.

Plant combinations

According to the legal definition in the InnAusV, plant combinations are hybrids of either multiple renewable energy generation types, or a renewable energy technology combined with a facility that can take in temporarily stored energy that comes exclusively from renewable energies, and convert it into electricity; that is, a battery energy storage system (BESS).

Either onshore wind or solar energy must be included. Except for one wind-based plant combination in Germany, combinations of solar and BESS have the highest practical relevance.

Fixed market premium

Until the most recent amendments in 2022, projects that have been awarded during an innovation tender were entitled to a fixed market premium applicable to projects that participate in a tender prior to December 1, 2022. Like EEG projects, the market premium subsidy requires direct marketing in the market-premium model which is the subsidized version of direct marketing and includes a ban of the use of guarantees of origin certificates.

However, the fixed market premium works differently compared to the usual (floating) EEG market premium: it’s paid as a surcharge to the power purchase price governed in a direct marketing agreement (DMA). The monthly market value for wind or PV doesn’t impact the fixed market premium. This means higher economic risks for the plant operator, but also more transparency of subsidy volume.

To address these market-value risks, plant operators typically aim at securing fixed-price arrangements in the direct marketing agreement that are more common in long-term Power Purchase Agreements (PPAs) for projects without EEG subsidies. From an off-taker’s perspective, this requires further contractual provisions to secure the underlying hedge or downstream supply agreement that forms the basis for the fixed-price off-take.

‘Floating’ market premium

According to the legislator, high electricity prices have recently led to an overfunding of innovation tender projects. The recent “Act on Immediate Measures for the Accelerated Expansion of Renewable Energies and Further Measures in the Power Sector” has amended the InnAusV and the EEG once again.

Most importantly for innovation tender projects, new projects that participate in tenders after Dec. 1, 2022, will no longer receive a fixed market premium, but the usual (floating) EEG market premium. Under EU subsidy law, this amendment still needs to be approved by the European Commission.

One of the biggest challenges of the InnAusV lies in the requirements for the integration of BESS to secure the subsidy over the entire 20-year funding period. The technical requirements as well as the verification requirements vary depending on the applicable version of the InnAusV but must be complied with. Currently, the InnAusV explicitly requires yearly verification by an environmental auditor. In the DMA, the marketing of the plant flexibility should receive separate provisions.

Crucially, the technical provisions for the use of plant flexibility need to be reviewed and drafted carefully to secure the subsidy for the entire statutory term. This may, for example, include a maximum of charge and discharge cycles per day. The legal requirements typically lead to conflicts of interest between the plant operator (and its lender), who wants to secure the subsidy, and the direct marketer/off-taker, who wants to use the flexibility of BESS.

A transparent contract design including a balanced risk-and-reward allocation is important for all parties. Lenders may also want to consider provisions in the loan agreement that require the plant operator to reserve appropriate funds to upgrade or retrofit the BESS at a later stage if need be.

Increasingly important

Innovation tender projects are becoming increasingly important, even though the design of the InnAusV poses some restrictions, in practice, to the utilisation of the innovation potential of BESS, because of the aim of securing subsidies at minimum costs. They may, however, be able to combine increasingly important grid stability and energy supply security.

Besides BESS, integration of hydrogen-based storage systems, including electrolysers, is set to become the next development for plant combinations. This will lead to further opportunities for lenders, who should monitor the legal requirements and amendments closely. 

About the authors

Daniel Breuer heads Osborne Clarke Germany’s energy and utilities practice and advises investors and lenders, asset managers, service providers, utilities and (corporate) off-takers mainly on commercial, regulatory, and transactional matters and disputes in the field of renewable energy projects and on all aspects of energy trading, direct marketing and PPAs, green hydrogen and the digital transformation of the energy industry.

Olexiy Oleshchuk advises financial institutions and funds as well as corporations in the areas of banking and finance law as well as restructuring and insolvency, with a focus on project and infrastructure financings.

Yelena Bonzel advises clients on energy regulatory matters, renewable energy projects and energy contracts including PPAs and green hydrogen.

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