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Germany: New investment opportunities under revised renewable energy scheme (EEG 2021 and WindSeeG)

  • Germany
  • Energy and infrastructure - Hydrogen

04-01-2021

 

On 1 January 2021, a revised version of the German Renewable Energies Act (Erneuerbare-Energien-Gesetz – EEG) entered into force (a revision to the German Offshore Wind Energy Act (WIndenergie-auf-See-Gesetz – WindSeeG) was already adopted in December 2020). The EEG 2021 and the revised WindSeeG are supposed to set the path for further renewable energy investments to support Germany’s decarbonisation targets by 2030 and beyond. Below, we summarise the amendments which are most important from an investor perspective.

Climate-neutrality of electricity consumption prior to 2050

The EEG 2021 still contains the goal from the previous version of the EEG that the share of electricity from renewable energy sources in the overall electricity consumption shall be 65% by 2030. The previous second target, that this share shall be 80% by 2050, has now been replaced by the goal that the generation of the entire amount of electricity generated or consumed within Germany shall become climate-neutral prior to 2050.

Implementation of European Green Deal

This goal is even more ambitious than the EU objective laid down in the European Green Deal to be climate-neutral by 2050, which is in line with the EU’s commitment to global climate action under the Paris Agreement, as well as the German Climate Protection Programme 2030. However, the EEG 2021 does not yet reflect the European Council proposal of 11 December 2020 to set a new binding EU target of a net domestic reduction of at least 55% in greenhouse gas emissions by 2030 compared to 1990, which is supposed to be reflected in the forthcoming European Climate Law.

Backdoor for CCS?

It has been discussed if the new reference to climate-neutrality (instead of a 100% share of renewable energy) is to be understood as a hint to the potential use of carbon capture and storage (CCS), which is struggling with social acceptance and currently only allowed for use in testing projects in Germany. A request from the upper house of the German parliament (Bundesrat) during the legislative process to clarify that climate-neutrality prior to 2050 shall be achieved “on the basis of renewable energies” has not been implemented. Therefore, it remains unclear whether the goal of climate-neutrality only acknowledges the fact that Germany will continue to import electricity from other countries with lower renewable energy targets and hence hardly be in a position to achieve a 100% renewables target or, whether, it can be interpreted as a forerunner for a new attempt to establish CCS in Germany.

Expansion path for more than 93 GW additional capacity by 2030

The 65% electricity from renewables by 2030 target shall be achieved through an increase of the installed capacity of the different technologies set out in the EEG 2021 and the WindSeeG:

Technology

Installed capacity target for 2030 (GW)

Minimum installation from 2021 to 2030 (GW)

Onshore wind

71

32.5

Offshore wind

20

12.35

Solar

100

45.6

Biomass

8.4

2.8

The installation goals have been criticised during the legislative process as insufficient to reach the target of a 65% share of renewable energy by 2030 taking into account that the demand for electricity is likely to further increase during the next few years due to electrification of traffic and electricity – intense production of hydrogen as foreseen in the German National Hydrogen Strategy (see our summary). On the other hand, the coalition of Christian Democrats and Social Democrats pointed out that electricity from renewable energy sources which is not subject to financial support under the EEG will play an increasingly important role in the future. In this vein, project developers announced the construction of large solar farms with capacities of over 100 MW which will be built without financial promotion under the EEG. Against this backdrop, the lower house of the German parliament (Bundestag) invited the Federal Government not only to define a further expansion path for renewables in Q1 2021 (to consider the expected increased EU target of a 55% greenhouse gas emissions reduction by 2030) but also to consider instruments to incentivise renewable energy projects financed by power purchase agreements (PPA) outside the EEG regime, e.g. through loan programmes of the German Credit Institute for Reconstruction (Kreditanstalt für Wiederaufbau – KfW) or tax incentives.

Award of financial support through auctions

Financial support under the EEG will be awarded through the auction scheme introduced in 2017. Auctions are, as a general rule, technology specific. Successful bidders in an auction receive, for a 20-year period from commissioning of the plant, market premium payments from the grid operator which top up the energy-specific average monthly power exchange price and reflect the respective bidder’s bid value (pay-as-bid).

Separate auctions for roof-top and ground-mounted solar plants

In recent years, solar energy has not played a major role in the German energy transition. While large ground-mounted solar plants (often without financial support under the EEG), appear to be a new trend, the EEG 2021 shall boost the installation of roof-top solar plants as well. This shall be achieved through the introduction of separate auctions for solar plants installed on, on top of, or in a building or on a noise barrier (so-called solar plants of the second segment) on the one hand and any other solar plants, i.e. in particular ground-mounted installations (so-called solar plants of the first segment) on the other hand.

Use of additional areas, in particular in Southern Germany

To allow for an implementation of the increased capacities foreseen for future auctions, additional areas for onshore wind farms and solar plants shall be made available. To that aim, the German Federal States (Länder) shall annually report on the status of the ongoing planning and permitting procedures for onshore wind farms and, as the case may be, on measures to make available additional suitable areas, in particular areas owned by the respective Federal State.

In addition, the installation of new onshore wind and biomass capacities in the south of Germany shall be promoted. Hitherto, onshore wind farms have mainly been installed in the north of Germany, in particular due to better wind conditions than in the south. As a result, the transport of power to the consumption areas in the south has led to grid congestions. Against this background, the EEG 2021 provides that at least 15% of new onshore wind capacity in 2022 and 2023 and 20% from 2024 onwards shall be installed in municipalities in the south of Germany defined in the EEG 2021 (Südregion). To achieve these quotas, bids for projects in this region shall be privileged in the onshore wind auctions until the relevant share is reached in the respective auction. Similar provisions apply for biomass projects.

Parallel development of offshore wind capacity and grid connections

To ensure that the power generated from the envisaged offshore wind capacity of 20GW by 2030, as well as the additional target of 40GW offshore wind capacity by 2040, will be transported onshore, the WindSeeG provides that the expansion of offshore wind plants and the expansion of the necessary grid connection lines shall be synchronised through parallel planning, permitting, construction and commissioning.

Easement of environmental and permitting requirements

Permitting procedures for renewable energy projects shall be eased and accelerated. A new framework for distance rules to promote the development of onshore wind was already created in May 2020 (see our summary). With respect to offshore wind, the WindSeeG provides that the Federal Administrative Court (Bundesverwaltungsgericht) will be competent as the first and final instance for objections against permits for offshore wind farms. In addition, under the EEG 2021, a cooperation committee (Kooperationsausschuss) shall be established to evaluate, inter alia, the duration of permitting procedures and if the expansion path can be fulfilled. The information gained from this procedure shall be used to discuss further acceleration measures.

Potential extension of implementation deadlines for onshore wind farms

In the past, the timely completion of onshore wind farm projects has been hampered, in particular, by delays due to third party objections against the permit for the wind farm. In addition, delays due to the insolvency of wind turbine manufacturers are a major risk for the completion of projects within the statutory law deadlines. To secure that developers of awarded onshore wind farm projects will be in a position to successfully implement their projects, and hence contribute to the envisaged renewables expansion, despite such risks, the EEG 2021 provides that the regulator will extend the relevant implementation deadline by up to 18 months in each of the two delay scenarios (i.e. by up to 36 months in total).

Increased acceptance of the energy transition

The EEG 2021 also foresees several measures to increase the acceptance of further renewable energies expansion in Germany.

Financial participation of municipalities

Operators of onshore wind farms may offer municipalities, which lie within a 2.5 km radius around the wind turbines, payments of up to 0.2 ct/kWh for the electricity generated by the wind farm. The municipalities are free to decide for which purposes they use such payments. From the plant operators’ perspective, the payments would be economically neutral as they may request refunding of the paid amounts from the grid operator. Therefore, payments to the municipalities would be financed through the EEG levy which is ultimately borne by the consumers. The Federal Government may introduce similar provisions for other renewable energy technologies in an ordinance.

Limitation of EEG levy

The amount of the EEG levy, which increased from 2.05 ct/kWh in 2010 to 6.756 ct/kWh in 2020, is considered as a crucial factor for the acceptance of further renewable energies expansion. In the future, the levy shall be partially funded through the Federal Government’s budget. Proceeds from the national CO2-pricing for the heating and transport sector applicable from 1 January 2021 onwards, as well as EUR 11 billion from Germany’s fiscal package for strengthening economic recovery after the COVID-19 crisis-induced economic downturn, shall be used to cap the EEG levy at 6.5 ct/kWh in 2021 and at 6.0 ct/kWh in 2022. For future years, a further decrease of the EEG levy, without contributions from budgetary funds, is envisaged.

Improved market and grid integration

In addition, the EEG 2021 contains several measures for an improved market and grid integration of renewable energies. This includes, in particular, the following:

No financial support for periods of at least four hours of negative exchange prices

Under the EEG 2017, plant operators are not entitled to market premium payments for periods where the spot price at the power exchange is negative for at least six hours (the so-called 6-hour rule). Pursuant to the EEG 2021, financial support for plants which are to be commissioned from 1 January 2021 onwards shall already fall away if the spot price is negative for at least four hours. The original draft bill of the Federal Government even provided for a 1-hour rule which was expected to result in a stronger incentive for renewable energy plant operators to mitigate periods of negative prices, e.g. through cooperation with storage operators. The same effect can, to a limited extent, be expected to be triggered also by the 4-hour rule. The legislator has announced that it will evaluate the 4-hour rule and might possibly further shorten the period of negative prices that leads to the loss of financial support under the EEG.

During the legislative process, stakeholders called for a compensation mechanism to be implemented with respect to the sanctions of the 4-hour rule. For plants affected by that rule, the 20 year promotion period will be extended by the total sum of hours during which financial support falls away due to negative spot prices at the power exchange, rounded up to the next full calendar day. The EEG 2021 therefore gives an incentive for greater market integration, and at the same time, plant operators will be compensated for the disadvantages this entails.

Digitalisation

To implement Germany’s digitalisation strategy for the energy sector, the EEG 2021 provides that operators of plants commissioned from 1 January 2021 onwards, and which have an installed capacity of more than 25kW or are located at a grid connection point where at least one controllable consumption device is connected, have to be equipped with smart meter gateways allowing the grid operator to access the feed-in status and to remotely control the plant’s feed-in capacity. New plants with an installed capacity from 7 to 25kW will have to be equipped with smart meter gateways as well to allow the grid operator to access their feed-in status. These obligations are less far-reaching than those proposed in the Federal Government’s draft bill, which also covered plants commissioned before 2021.

Promotion after expiry of 20-year period

The 20-year promotion period will, over the coming years, expire for a continuously increasing number of renewable energy plants. According to studies conducted by industry players, in 2025 almost 25% of the onshore wind farms in Germany will need a new marketing concept to avoid their decommissioning after the end of that period. Re-powering, i.e. replacing the generators of a wind farm by new generators on the basis of a new permit and subject to a new EEG promotion, is not always possible (although it might be facilitated by additional legislative measures in the future). Another approach for plant operators is to sell the electricity generated after the end of the 20-year period under long-term PPAs with specialised off-takers. However, stakeholders have different views on whether this approach would ensure economic viability of a sufficient number of wind farms.

Against this backdrop, the EEG 2021 provides that, as a transitional measure, auctions for onshore wind farms whose promotion periods expire at the end of 2020 or the end of 2021 will be held. Operators of such wind farms may participate in the auctions if the erection of new wind turbines in the wind farm area is not admissible under planning law. The volumes to be auctioned will be 1,500MW in 2021 and 2,000MW in 2022. Further details of the auctions, including the maximum bid value (which must be between 3 and 3.8 ct/kWh) will be contained in an ordinance to be issued by the Federal Government. Successful bidders will receive a feed-in tariff until the end of 2022. Operators who do not benefit from such feed-in tariff following an auction will be entitled to a feed-in tariff corresponding to the energy-specific average monthly power exchange price plus a premium (from 1 ct/kWh to 0.25 ct/kWh) until the end of 2021.

In addition to that, as a reaction to lower electricity prices due to the COVID-19 crisis, operators of renewable energy plants, other than onshore wind farms with an installed capacity of up to 100 kW may, until the end of 2027, can sell the electricity to the grid operator against payment of the energy-specific average annual power exchange price deducted by a marketing fee.

Promotion of hydrogen production

The revised renewable energy scheme contains several measures to enable realising Germany’s ambitions to become a leading player in the production of hydrogen, in particular with electricity from renewable energies (green hydrogen).

Offshore production of green hydrogen

The WindSeeG foresees the designation of areas for the construction of offshore wind farms without grid connection which can be used for the production of green hydrogen. Dedicated auctions for such wind farms shall be held on the basis of an ordinance to be issued by the Federal Ministry for Economic Affairs.

Exemption from EEG levy for production of green hydrogen

As announced in Germany’s National Hydrogen Strategy, electricity which is used to produce green hydrogen and does not benefit from an EEG promotion shall be fully exempt from the EEG levy. However, this provision will only be applicable once the Federal Government has issued an ordinance defining standards for green hydrogen. The ordinance may also provide that, under lower requirements, the EEG levy will only be reduced to a certain extent. The provisions will apply to plants commissioned before 1 January 2030.

Limitation of EEG levy for production of other hydrogen

Undertakings producing hydrogen other than green hydrogen and operating a certified energy or environmental management system can apply for a limitation of the EEG levy to 15% (with a floor of 0.1 ct/kWh).

Outlook

The application of the EEG 2021 is still subject to the European Commission’s State aid approval. It is questionable whether the approval will be obtained prior to the first auctions which will be held on 1 February 2021.

Although the recent reform of the EEG and WindSeeG has been criticized as not ambitious enough to reach Germany’s decarbonisation targets, the German renewable energy market remains interesting in that it offers investors attractive investment opportunities based on a stable regulatory framework.

Irrespective, further measures to promote the development of renewable energies in Germany, based on the EEG or outside that regime, can be expected to be taken soon. The legislator has invited the Federal Government to consider further action in particular with respect to the following:

 

  • further increase of the expansion path to consider the new EU climate goals
  • incentives to finance renewable energy projects through PPAs
  • easement of permitting requirements (in particular for repowering)
  • incentives for municipalities where onshore wind farms are located through allocation of higher share of trade tax.

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