Why a flash of inspiration alone is not enough… How to fund energy innovations in German municipalities?

How to fund energy innovations in German municipalities?
Published by Pia Buschmann on 03.12.2014

Achim (fictional name), mayor of a tiny German municipality is finally coming close to make his vision reality…

… At the beginning of his voyage there was not more than his idealism and strong motivation to make renewable energy sources (RES) a real success for his community. It was harder than he thought: citizens, businessmen and even political fellowmen had to be convinced that implementing RES will create value! Long workshops and meetings with even longer discussions, consultation of technical and engineering experts, quarrels about the distribution of burdens and advantages… As it was not the only task of his duties as mayor, Achim´s vision faced turbulences… However, in the end he made it: most of the people stood behind him, location and size of an innovative heat grid powered by RES were set. But still there was one important thing to be defined: how will the community finance the implementation after all?

Especially if RES plans are due to be installed in smaller municipalities, financing is the biggest issue. The community budget is in most cases extremely limited, while the political to-do-list seems endless, and each Euro invested in RES is though about twice, analyzing whether it will bring return on investment into the region. There are, however, a few funding opportunities worth to be taken into consideration.

The German Fundaing Landscape – a brief assessment from a municipal perspective

The most popular area is federal and state public funding grants. This type of funding can roughly be divided into two groups: research activities and direct assistance. Research projects are commonly difficult to handle for municipalities, since an attractive constellation of partners is mandatory (R&D institutions, companies) and the measure to be implemented has to match the overall aim of the project. If applicable, this option is attractive though due to its relatively high funding rates (up to 100% grants).

Direct assistance (e.g. “Energy-efficient and climate-protective production processes”; a recent call of the German Federal Ministry for the Environment, Nature Conservation, Building and Nuclear Safety) normally enables municipal actors to address and implement their measures directly without adaptations, sometimes in cooperation with local businesses. The grant usually consists of a co-financing up to 90%. The challenge of raising own complementary funding thus remains.

Both grant options are rarely designed exclusively for municipalities. Having cooperation partners from companies or universities is a nice-to-have for communal actors. These funding measures are quite often published in a time-limited call for proposals, sometimes on an annual regular basis. Although financially applicable, applying for this sort of funding requires free personnel capacities in the municipalities to prepare a proposal in the course of a couple of weeks. For small municipalities, this poses another big challenge.

Additionally, federal institutions like the KfW (German government-owned development bank) offer various loan programs explicitly for municipalities. For example the funding schemes “Energetical reconstruction of cities” or “Municipal energy concepts” provide loans with a rather low interest rate and no formal budget limit. Although the program is interesting, signing a long-term liability is a big decision for municipalities. Furthermore, this type of funding usually foresees concrete areas of action and needs some negotiation beforehand, whether a highly innovative idea is mature enough to be put into reality. These considerations are also widely applicable to European loans (from the European Investment Bank).

On the other hand, there is of course always the option of private funding. Lucky are those, who find a rich company or other private investor to finance their RES plans. But in most cases this remains a bold dream. Of increasing popularity are contracting companies, which like to care about the financing of a RES facility themselves. This includes the possibility that the municipality itself may not benefit financially from its plan, since it is usually obliged to pay the contractor a fix amount for several years.

In the end, there are many options, but each of it has some strings attached. As in mayor Achim´s case, finishing the process of creating a visionary RES approach means starting the long process of looking for funding. This issue affects not only German municipalities, but any municipality with ambitious RES targets in the world (of course here the list of options differs from context to context).

No doubt that this search for funding is subject to many projects, studies and other research activities. To reach the next stage of taking municipal RES actors to the implementing phase, we need a much more structured and transparent financing process that municipalities can either handle autonomously or with the unbureaucratic support of a helpdesk.