Having decided to phase out its nuclear power plants, Germany is in the midst of a major construction programme of new coal-fired power plants as exemplified by Trianel's Lunen project which closed earlier this year.
However, project sponsors find themselves caught between a shortage of debt capacity from project lenders and fierce protests from environmental groups who oppose the building of new-coal fired plants because of their high CO2 emission levels.
At the same time, the big utilities are understandably conservative about their balance sheets, and may feel that now is not the right time to press ahead with new plants in a controversial segment of the electricity market.
The situation is further complicated by changing European Union rules which will see a reduction in free allowances under the Emissions Trading Scheme (ETS), meaning that increased CO2 prices will need to be factored into German power prices. Meanwhile there is also discussion within German political circles to prolong the phase-out of nuclear reactors, which would impact the future competitiveness of coal-fired plants.
Despite all these difficulties, bankers are still pressing ahead with preliminary work on project financings, hoping that the lending environment will improve in the first half of 2009. Tenors are likely to be shorter than the 25 years seen on past financings, and sponsors may be asked to up equity levels. But deals are still viewed as fundamentally bankable, and if even half the planned coal-fired plants manage to get past environmental objections, that will still leave a sizeable amount of business...
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