Energy suppliers need to invest a total of EUR 535 billion in the regional energy transition by 2045

• Enterprises face a financing gap of EUR 346 billion
• The bulk of investment will have to be made in the next ten years
• New financing approaches are needed

Implementing the energy and heating transition at regional level poses massive challenges for energy providers. They must invest a total of EUR 535 billion in electricity and gas distribution networks and grid-connected heating supply by 2045. Around two thirds of this sum will likely have to be invested by the year 2035.

These are the results of a study which KfW commissioned with the auditing and consulting firm PwC Germany.

The companies and their owners will have to rethink their financing approaches. Their internal funding capacity enables them to meet only around one fourth of their investment needs. A further ten per cent could be funded by way of newly obtained subsidies in the form of promotional funds and building cost subsidies. That leaves a financing gap of EUR 346 billion, which represents 65 per cent of the total investment need. Energy providers will have to close this gap with new equity estimated at EUR 47 billion and debt capital to the tune of EUR 299 billion.

Most of the investment needs will arise in the next ten years. That means EUR 40 billion in additional equity and EUR 218 billion in debt capital will be required up to the year 2035, when roughly the peak annual investment volume will have been reached. This estimate is predicated on the assumption that investing companies maintain an equity ratio of at least 25 per cent.

“In the coming years, energy providers will have to shoulder gigantic investments in the energy transition. This will exceed the limits of traditional loan finance. A successful modernisation of the energy infrastructure also requires policymakers to think about how the financial toolkit can be expanded,”

said Dr Dirk Schumacher, Chief Economist of KfW.

“Our analysis shows that almost all companies will require additional equity and considerably more debt capital in the coming years. New financing instruments, partnerships and innovative models need to be developed to complement traditional bank loans. Successfully financing the energy transition will require a join effort by municipalities, banks, investors and promotional institutions,”

said Henry Otto, Head of Energy Consulting at PwC Germany, which prepared the study on behalf of KfW.

The high investment need is a particular issue for municipal utilities since their profits are often used to cross-finance other municipal tasks. As a result, these funds are only partly available to co-fund the energy transition. There are also likely to be limits to how much debt capital they can raise in the form of bank loans. According to estimates by PwC, loans provided by German banks to energy suppliers currently amount to around EUR 130 billion. Accounting for repayments on existing loans, a net increase of EUR 100 billion would have to be expected up to the year 2035 if the debt capital requirements were to be met exclusively with new loans. The options for such a strong credit expansion are likely to be limited, particularly for banks operating regionally and with a focus on the energy sector.

Various approaches are conceivable to expand the range of financing solutions: Large energy suppliers could make greater use of debt loan certificates. Suitable promotional programmes, for example in the form of syndicated co-financings from promotional institutes or the assumption by the state of part of the loan default risk, would be another way to expand credit financing options. The securitisation of loans and the distribution of risks to third-party investors could free up capital for the banks and provide more lending capacity.

In order to bolster the equity base of municipal energy suppliers, the Association of German Public Banks (VÖB) has already presented a proposal which would require amendments to parts of municipal law in the federal states. Mezzanine capital instruments involving promotional institutions could also be a solution. These would be treated as subordinated to the traditional debt capital but would have no voting rights. Furthermore, capital management companies could bundle additional funds from private investors and use them in the form of subordinate capital to finance a wide range of energy providers.

You can find the full version of the study at Fokus Volkswirtschaft | KfW (in German).