Inside Infrastructure: Germany braces for the boom

Energy and infrastructure strategy gains traction

The implementation of Germany's €500bn infrastructure special budget (ISB) earlier this year made headlines around the world – after decades of neglect, Germany is finally pushing to upgrade its energy and infrastructure landscape. While the ISB is widely perceived as a foundational step towards a transformative era with many exciting opportunities for investors, the details and long-term impact of the ISB have largely remained undefined. It’s time to take stock of the recent developments and consider the outlook for the coming months.

These strategic shifts are already translating into tangible market activity. For instance, recent months have seen an (indirect) Apollo investment into Amprion as well as TenneT Germany’s successful raise of equity provided by Norges, APG and GIC. Such investments require smart legal and financial structuring to enhance return profiles and attract the necessary capital for Germany’s grid expansion. Looking ahead to 2026, we anticipate first utility scale green hydrogen project financings, significant investments into digital infrastructure (including into adjacent ‘picks and shovels’ targets) as well as further co-investments into electricity grids. The successful acquisition by a Partners Group led consortium of Techem, a leading German service provider for smart and sustainable buildings, could well mark the beginning of heightened transactional activity in smart metering businesses. This trajectory underscores a robust deal pipeline in the German energy transition and infrastructure sectors.

Federal budget

Following the European Commission’s green light for Germany’s investment plans (albeit with the commitment to tighten spending after the initial ramp-up), the German Federal Cabinet has tabled the draft federal budget for 2026 along with the multi-year plan for 2027-2029. These drafts will be debated in German parliament and are expected to be passed prior to year-end. The draft provides for investments through the ISB of €48.9bn in 2026 (compared to approximately €27bn in 2025), a level that will roughly be maintained in subsequent years. While details on private capital participation and the specific financing instruments to be deployed remain generally vague, the draft 2026 budget illustrates the government’s investment priorities: transport (€21.3bn), digitalisation (€8.5bn), hospital transformation (€6bn) and energy infrastructure (€2.1bn).

The federal budget for 2025, showing similar focus areas, and the law establishing the ISB have been passed by parliament (the latter being subject to approval by the Bundesrat) with retroactive effect as of 1 January 2025.

Wider legal framework

The government’s efforts to enhance the attractiveness of investments in the German market are evident in various further legal initiatives, aimed at stimulating economic growth. 

• Investment Ordinance: In February 2025, significant amendments were made to the German Investment Ordinance which we have discussed in a separate briefing. These included the introduction of a dedicated 5% quota for infrastructure investments as well as the broadening of the definition of eligible infrastructure to include emerging asset classes.

• Location Promotion Act: The Ministry of Finance has presented a draft of the Location Promotion Act The draft is subject to consultation procedures and parliamentary debate. Assuming timely parliamentary progress, the enactment of the Location Promotion Act by the end of 2025 appears achievable. Alongside measures aimed at easing financing of small enterprises and start-ups (including the implementation of the EU Listing Act), the draft proposes amendments to the current investment tax framework. The proposed investment tax and investment regulatory law changes are essentially the same as in the draft bill for the German Future Financing Act II. They aim to boost fund investments into renewable energies and infrastructure by removing regulatory uncertainty, loosening certain regulatory restrictions, and granting tax reliefs – both in monetary and administrative terms – for such investments. The draft bill also includes a number of welcome (general) clarifications and administrative simplifications regarding the taxation of investment funds.

• Electricity tax and grid charges: To alleviate the burden of high energy prices on businesses, further draft legislation in Germany proposes a reduction of the electricity tax to the EU-wide minimum for the energy-intensive manufacturing and agricultural sectors. This would benefit an estimated 15% of German enterprises but excludes key digitalisation sectors such as data centres and telecommunications. Additionally, to mitigate rising grid charges, which currently account for 25-30% of the electricity price due to renewable energy grid expansion, the government plans to provide €26bn in subsidies to transmission grid operators over the next four years, financed through the Climate and Transformation Fund. 

• Electricity markets: Germany’s latest electricity supply report confirms that security of supply remains robust, provided renewables, grids and flexibility are expanded at pace. However, the analysis also indicates a looming requirement for 20–35 GW of new dispatchable capacity by 2035, rendering a capacity mechanism virtually inevitable. For investors, this signals a shift away from the pure energy-only market towards policy-backed capacity revenues. Details on market design and auctions for capacities are being finalised with the European Commission at the moment and are expected to be published by the end of 2025. At the same time, funding for renewable energy installations in Germany will change significantly because, as of 17 July 2027, EU law requires that funding for new renewable power plants occur primarily through contracts for difference rather than one-sided payments that merely function as downstream protection, such as market premium payments under the current version of the German Renewable Energy Sources Act.

• Grid expansion: At the same time, grid expansion is now firmly recognised as the backbone of the energy transition. The forthcoming EU Grids Package will reinforce this priority, with measures to accelerate permitting and incentivise anticipatory investments. Private capital is already exploring opportunities in this sector. In parallel, the German regulator is advancing the 'NEST' process, which revises the regulatory framework for tariff-setting in gas transmission and electricity and natural gas distribution networks. The current proposal includes measures such as shortening regulatory periods to three years, setting allowed returns using a weighted average cost of capital approach, shifting to a pure real capital maintenance regime and tightening efficiency benchmarking. Furthermore, the regulator has issued a discussion paper, indicating that grid fees for electricity Transmission System Operators will be determined on a cost-plus basis, a development expected to significantly enhance the attractiveness of these assets.

Remaining challenges and outlook

Collectively, these developments point to a more favourable outlook for investments in German infrastructure and ancillary assets. However, investors are eager to see the remaining challenges tackled – particularly against the background of the German government having stressed the need for private capital to multiply the impact of public funds to be deployed. Aside from remaining red tape and bureaucracy, certain investments remain unattractive due to regulation. For example, limitations on the maximum return on equity investments in transmission grids are perceived as internationally uncompetitive, thereby restricting the pool of potential investors. The Federal Network Agency has recognised this. 

Beyond the (welcomed) legislative measures already introduced, the German government must provide incentives to attract private capital investments in German infrastructure and publicly announce their general availability. These could include – in each case subject to state aid considerations – risk coverage for delays and cost overruns, for example, the state could provide subordinated equity through ‘first-loss’ structures. Aside from financing and guarantees provided by state-owned KfW, the investors’ risk profile could be enhanced by establishing public private partnerships with attractive compensation mechanisms or joint ventures featuring guaranteed return structures. Finally, drawing on successful examples in other European jurisdictions, funding models providing for returns already during the construction phase could be considered. 

Key investment challenges remain, but they appear to be moving up on the political agenda, as progress has been made in addressing financing needs. In a further effort towards attracting private investors, the German Federal Chancellor recently appointed Martin Blessing, the former CEO of Commerzbank, as Chief Investment Officer. Together with the international agency Germany Trade and Invest, Blessing has been tasked with promoting investments into Germany. In addition to the new CIO, the Ministry of Finance has appointed an advisory board to oversee and drive spending of the ISB funds. Comprising business leaders, representatives of academia and local politicians, its mandate is to identify impediments to investment in the German market. These joint efforts suggest that planning and permitting procedures may be streamlined and administrative complexity reduced, thereby further strengthening Germany’s attractiveness to investors. If these efforts are combined with well thought-through legal and financial instruments, which are readily available and capable of providing an attractive risk/return profile to investors, as well as a swift deployment of ISB funds, sufficient private capital can be leveraged to ensure a meaningful and lasting impact from the €500bn budget. 

And finally, Real Asset or Fake News?

Well done to everyone who spotted that Homer Simpson can’t hang up his safety goggles just yet, with human oversight still a critical component of nuclear power safety systems. This week we are back on the move and riding the rails, but which of the following “facts” is just a puff of smoke?

1. Higher, further, faster: China’s high-speed rail network is growing by around 3,000 kilometres every year, already connecting more than 70% of its major cities.
2. Is there light at the end? At over 57 kilometres, Switzerland’s Gotthard Base Tunnel is so long that trains require advanced ventilation systems to maintain air quality whilst travelling through.
3. Steaming ahead: With their main emission being water vapour, a fleet of environmentally friendly steam engines are currently under construction, to be trialled on the Island of Sodor.
4. Faster than a speeding bullet train… The fastest commercially operating passenger train can travel at 460 km/h, and “maglev” prototype trains have reached speeds exceeding 600 km/h in test runs.
5. Sunshine sleepers: Solar-powered railway sleepers that convert sunlight directly into electricity to help power on-board train systems are being tested in Europe.

As always, if you think you know which fact is fiction please reach out – we will publish the answer in next week’s post.