535 billion euros by 2045 - energy suppliers face huge financing gap

The implementation of the energy and heating transition poses enormous financial challenges for municipal utilities and energy suppliers in Germany. A recent KfW study, conducted by PwC, puts the investment requirement at around 535 billion euros by 2045. This is for the conversion of electricity and gas distribution grids and the development of a grid-connected heat supply alone.

Two thirds of the investments must be made by 2035

According to the study, the majority of the funds will be needed in the next ten years. Around two thirds of the total investment will be required by 2035, with an annual investment peak of around 43 billion euros around 2033/2034. The electricity distribution grids in particular are under pressure, as the expansion of renewable energies requires rapid grid investments.

Only a quarter can be financed internally

The study shows that the internal financing power of energy suppliers is nowhere near sufficient to cover these sums. Only 25 percent of the investments can be financed from their own resources, with a further 10 percent coming from subsidies or construction cost subsidies. This leaves a financing gap of around 346 billion euros, or 65 percent of the total capital requirement.

Of this, 47 billion euros is accounted for by equity and 299 billion euros by new loans. Most of this external capital requirement will arise by 2035, which is likely to be a time when many municipal energy suppliers are already under financial pressure.

Municipal utilities are reaching their limits

Municipal utilities in particular, which are often also responsible for local public transport or services of general interest, are facing particular difficulties. Their profits are often used to cross-finance other municipal tasks, which severely limits the scope for equity injections.

In addition, many banks (especially regional institutions) are reaching their limits due to regulatory credit limits if they are to service the massive borrowing requirements.

New financing models required

The study emphasizes that traditional financing methods will not be sufficient. Instead, a broad mix of instruments is needed to tap into new sources of capital. Among other things, it discusses

• Promotional loan programs with risk assumption by the state,
• loan securitization to relieve the burden on regional banks,
• mezzanine financing and capital pooling models,
• as well as public-private partnerships and citizen participation.

Adjustments to municipal law could also help to ensure that municipalities are allowed to take out loans in future in order to contribute equity to their municipal utilities.

No progress without fresh financing strategies

The energy transition at regional level stands and falls with financing. The KfW study makes it clear: without additional sources of capital, there is a risk of investment backlogs that could slow down the modernization of the energy infrastructure. A rapid ramp-up of new financing instruments is therefore crucial so that municipal utilities and energy suppliers can make their contribution to climate neutrality.

Financial pressure on municipalities and citizens

Many municipalities and private households are already under considerable financial pressure. If the economic situation in Germany continues to stagnate, it is unlikely that additional funds will be made available to regional energy suppliers. In order to nevertheless make the necessary investments, funds would have to be redistributed from local budgets - automatically at the expense of other municipal tasks. It remains to be seen what answers politicians will find to this challenge and what solutions they will ultimately come up with to finance the energy transition at regional level without jeopardizing other public services.

The entire study can be found at Kfw under Focus on the Economy.