Q&A Interview: Tim Koenemann, Commerzbank

How is the mood in European wind?

It’s an interesting time for the energy transition. Nobody questions that it’s necessary but the circumstances have changed drastically: interest rates, supply chains, Covid etc. There’s a lot of positivity because of high electricity prices, but uncertainty too.

The OEM [original equipment manufacturer] sector is more muted than developers because OEMs really feel the pinch of inflation on contracts they locked in one or two years ago. They were on quite slim margins even before this year. But talk to anyone else – developers, IPPs – and they see a positive environment. Inflation doesn’t affect them to the same degree while energy prices are high and they know there is massive investment potential for 10, 20 or even 30 years.

Is this because wind is seen as important for energy security?

Exactly. In Germany, we want to do five or six times the amount of new-build wind in the coming years as recent years. This means developers should be able to secure high tariffs in upcoming auctions because they will not be so competitive.

Even if developers’ margins are squeezed, they are still doing very good business. They can sell power on the open market for two or three years while power prices are expected to be exceptionally high, and can then exercise any financial support from the government when they need to go back to a more stable revenue base.

How does this affect Commerzbank?

We started a restructuring in 2021 to make sustainability one of four pillars.

Our goal is for the bank to do business of €300bn by the end of 2025 and, in renewables, we want to grow our portfolio by €10bn by 2025 without being Europe-centric. We have longstanding desk in New York for the Americas and are planning to open one in Singapore for the Asia Pacific region in 2023; and we want to go into new technologies as well: green hydrogen, power-to-X, battery storage, and potentially grids.

Is green hydrogen attractive for banks yet?

The amount of announced green hydrogen projects is immense but it’s not project financeable yet. The technology isn’t bankable at scale so banks need additional protection, and there is also no valid price prognosis for what those schemes will generate in future. We assume we will see more of that certainty pretty soon. What we see on the policy side, with support for the industry, is a prerequisite for the industry being successful.

Separately, we have invested on battery storage on a standalone basis, but that is in the US because there are regulatory requirements for storage. That is something we can bank on. But for any new technology, the focus must be on making it bankable and bringing cost down through knock-on subsidies.

Is the new German government doing a good job so far?

It’s positive that they are setting targets and trying to make progress on permitting, but we are still a federal republic. It’s only partly in the hands of central government to force states to make land available and accelerate permitting processes, but that’s slow; and Germany is also very behind i.e., in the digitalisation of permitting, which is very driven by hard copies. There are a lot of inefficiencies and states also don’t have enough manpower in permitting departments.

This also means that a lot of companies in Germany are trying to scale up, but the market is still quite scattered. One way of generating efficiencies on the financing side is the bundling of projects together into big portfolios to make them more attractive for financiers. I want to have huge projects!

One recent market trend is that developer pool their pipeline of projects into portfolios, secure short to mid-term bridge financing, and then draw down on that financing when each of the projects reach ready-to-build status – providing this higher degree of flexibility and the additional risk associated with an often largely uncontracted revenue profile comes at a cost in terms of higher margins and lower gearing. Those structures will evolve.

Is offshore wind giving you that scale?

It can do. We love the offshore concept. We’ve been there from the start and I think €1.5bn of our portfolio loans are in offshore wind alone. We’ve done deals in Germany, France, Belgium and the UK, and we’ve recently entered the US market because it’s a very attractive business model. They aren’t always easy but such chunky deals are fun from a financing perspective.

Floating offshore wind is progressing very quickly too and will open lots of new areas and markets, but there are concerns with it being a young technology.