German Government approves draft law on increased offshore wind targets and revised auction scheme

• Germany

• Energy and infrastructure - Clean energy

09-06-2020

The German Federal Government has approved a draft amendment act to the German Offshore Wind Energy Act (Windenergie-auf-See-Gesetz) and other related acts. The draft law contains various changes to the German offshore wind regime to contribute to Germany’s target of 65% electricity from renewable energy sources by 2030 and further decarbonisation beyond that date. This includes increased offshore wind targets, necessary changes to the auction scheme for the next offshore wind tenders starting in 2021 as well as a basis for a framework for offshore wind farms without grid connection, namely to produce hydrogen.

Increase of 2030 target from 15 GW to 20 GW and new 2040 target of 40 GW

The draft law implements the increase of the 2030 offshore wind target from 15 GW to 20 GW, which the Federal Government had already agreed upon in September 2019. Other than the 15 GW target under the current regime, the increased 20 GW target is not supposed to operate as a cap but may explicitly be exceeded by 2030.

In addition, the Government proposal contains a new target of 40 GW by 2040, which will require average annual generation and grid capacity increases of 2 GW from 2030 to 2040. This ambitious target aligns with the industry request of at least 30 GW by 2035 as well as with the scenario framework 2021 – 2035/2040 prepared by the German power transmission system operators and a concept paper of the Federal Maritime and Hydrographic Agency (Bundesamt für Seeschifffahrt und Hydrographie – BSH).

Further capacity increase through cooperation with third countries

A further increase of the offshore wind generation capacity is envisaged through cooperation with other EU Member States bordering the North and Baltic Sea. This may include the opening of auctions for wind farms located in the territorial waters or the Exclusive Economic Zone (EEZ) of other EU Member States as well as common auctions organised with one or more other EU Member States.

More efficient permitting procedures for offshore wind farms and grid connections

The draft law provides for several changes to the planning and permitting processes for offshore wind farms and grid connection lines to reflect the increased expansion target.

This includes that prior to any publication of an auction by the Federal Network Agency (Bundesnetzagentur – BNetzA) only those areas which are auctioned in the respective year (and not also already those which will be auctioned in the following year) must have been pre-assessed by the BSH under the applicable central site development and site investigation regime.

In addition, the draft law explicitly envisages a synchronisation of the expansion of offshore wind farms and the relevant grid connection lines to reach parallel planning, permitting, installation and commissioning. Moreover, the BSH may decide not to carry out public consultation during the planning procedures for offshore grid connection lines. This reflects the very limited number of objections submitted during such consultations in the past.

Flexible auction volumes

The current specification of auction volumes from 700 to 900 MW per year will be replaced by a more flexible regime. According to the explanatory memorandum to the draft law, auction volumes need to increase from approximately 950 MW in 2021 and 2022 to approximately 3,500 MW in 2025 to reach the 20 GW by 2030 target.

Such flexibilization of the annual auction volumes will also facilitate a potential shifting of volumes to the next year if, prior to the publication of an auction, it turns out that necessary grid connection lines will not be available at the date of the planned commissioning of the respective offshore wind farms. In such case, the BNeztA shall, in cooperation with the BSH and to the extent possible, shift auction volumes to other areas, or reduce the auction volumes, which will then have to be considered in the next auctions.

Revision of auction scheme

A revision of the auction scheme for offshore wind farms has become necessary because of the zero cent bids by some of the successful participants in the 2017 and 2018 auctions. Pursuant to the current version of the Offshore Wind Energy Act, the allowed maximum bid value for the forthcoming auction rounds would therefore be zero cent per kWh. If only zero-cent bids are admissible, the mechanism does not allow for a differentiation between the bidders. In addition, according to the explanatory memorandum to the draft law, a maximum bid value of zero cent does not appear to be appropriate to reflect the cost-relevant differences of the areas that will be auctioned in the future.

Against this background, the draft law contains a determination of maximum bid values based on calculations of the expected technology costs and considering the cost-relevant aspects of the auctioned areas, which range from 7.3 cent per kWh in 2021 to 6.2 cent per kWh for the auctions from 2023 onwards. In addition, it specifies that negative bid values will not be admissible.

In the event of several zero-cent bids in one auction, the BNetzA will invite the relevant bidders to participate in a second, dynamic bid procedure. During this procedure, bidders may express their willingness to pay a so-called “offshore grid expansion fee” to cover part of the grid operators’ offshore grid expansion costs. The fee is payable in equal annual instalments over a 15-year period after commissioning of the first wind turbine. The BNetzA will, in a staggered process which generally involves several auction rounds, propose bid values which form the basis for the calculation of the offshore grid expansion fee to all remaining bidders and inform the bidders of the number of the remaining bidders. Bidders may then decide to accept or not to accept the respective next, increased bid value. Accordingly, each bidder will to a certain extent be able to perceive the other bidders’ willingness to pay. This approach ensures that bidders will not over-evaluate the potential of auctioned areas and hence will not have to pay excessive offshore grid expansion fees. At the end of the procedure, the BNetzA will award the tender to the remaining bidder who is willing to pay the highest offshore grid expansion fee or, if several bidders are willing to pay the same highest amount, award the tender to one of them on the basis of drawing by lot.

The approach of the second, dynamic bid procedure resulting in the payment of an offshore grid expansion fee has been heavily criticised by industry representatives. In their view, it creates additional risks for bidders and impedes cost efficiency. The preference in the industry would therefore generally be a contract for difference model. Based on the experience in other countries, namely the UK, such models allow to decrease the electricity generation costs due to stable financing costs.

Adjustment of implementation deadlines

The draft amendment act provides for several changes to the implementation deadlines contained in the Offshore Wind Energy Act: On the one hand, implementation deadlines will be shortened (e.g. start of installation of the wind farm needs to occur at the latest six, instead of three, months prior to the scheduled grid connection completion date). This is expected to increase the likelihood of a faster project implementation and, hence, to have a positive effect on reaching the German energy mix targets. On the other hand, the revised Offshore Wind Energy Act shall specifically allow for deadline extensions of up to 18 months in the event of insolvency of the wind turbine manufacturer for a specific wind farm.

Offshore wind farms without grid connection for hydrogen production

Finally, the draft law appreciates that the successful development of concepts for other energy production, namely hydrogen, by offshore wind farms without a grid connection requires an assignment of usage rights based on objective, transparent, non-discriminatory and efficient criteria, rather than on a first come first served basis. Therefore, the draft law contains an entitlement for the Federal Ministry for Economic Affairs and Energy to issue secondary legislation in this respect.

This ties in with the recently published National Hydrogen Strategy of the German Government which contains, as a first step, a 5 GW green hydrogen production capacity target in Germany by 2030 -see our client briefing of 11th June 2020 here.

Outlook

The draft law will have to take its way through the legislative procedure involving both houses of the German Parliament. Major discussions might occur around the new auction scheme. It remains to be seen if the industry request for a contract for difference mechanism will ultimately prevail.

Apart from that, further changes to the German renewable energies regime are expected to affect distance rules for onshore wind farms as well as the further expansion of solar plants (see our client briefing of 22 May 2020 - German Government finds compromise on onshore wind distance rules and abolishment of solar cap).