UK & Europe
Energy & Natural Resources
For many years, Germany as an energy hub has been trying to promote the generation of renewable energy in line with the long-term objective of rendering the use of coal and nuclear fuels obsolete. The expansion is, therefore, promoted and regulated through corresponding subsidies from the Federal Republic of Germany. This also applies to the very lucrative offshore wind farm sector in Germany, which is regulated by the Offshore Wind Energy Act.
In recent years, however, the Act has caused increasing problems in connection with the awarding of projects to the various interested parties. Previously, the company that was willing to accept the lowest amount per kw/h was awarded the contract. Over time, however, bids of 0 cents were increasingly being submitted, sometimes by several bidders at the same time. From that point on it was difficult to determine who should be awarded the contract among all the equally low bids. The question was asked: Should negative bids become necessary in future? Or will the successful bid be determined by means of a draw and pure luck?
Since these questions were difficult to answer on the basis of the legal situation at the time (please also refer to our previous articles on the Offshore Wind Energy Act), the legislator decided to revise the statute last year. The amendments that followed from this will be analysed below.
The amendments to the Offshore Wind Energy Act entered into force on 10 December 2020. The statute was not changed from top to bottom but was furnished with several quite remarkable innovations that will determine the future of offshore wind energy installations.
The most important and most-discussed modification is the decision not to include a second bid component, which could be decisive in case of equal bids. At the same time, bidders are still not allowed or encouraged to make negative bids. Many voiced the fear that such a component could increase the risks of the companies and at the same time reduce the pool of applicants, as not everyone would be willing to participate in such a commercially risky procedure with unforeseeable outcomes. In forthcoming cases of several 0 cent bids, the decision between the applicants will be made through a lottery procedure, as section 23(1) of the Offshore Wind Energy Act stipulates. However, according to section 23a of the Offshore Wind Energy Act, the suitability of the lottery procedure is to be reviewed again in 2022. On this occasion, the German legal situation may be adapted to the procurement procedures of other countries if necessary.
The reason for the rejection of a second bid component or a comprehensive examination of the effectiveness of the bids submitted by the applicants could be the additional work associated with such criteria, which could have hindered the rapid expansion of offshore wind energy installations. According to the legislator, swift progress is to be made here:
By 2030, German wind farms are to generate 30 gigawatts; by 2040, even 40 gigawatts are planned as prescribed by the target set in section 1 of the Act. These figures ought to be consistent with the European plan of generating at least 300 gigawatts by 2050 in order to achieve the European Union's envisaged climate neutrality by that time.
Overall, the EU wants to achieve more cross-border coordination of wind farms and their power lines and also promote research and development in this area. Of course this also means increasing the volume of tenders in order to achieve the goals described above in the specified timeframe.
This contrasts with the envisioned enhanced synchronisation of offshore connection lines and wind farms in Germany which is intended to be achieved through the amendments to the Act: should it become necessary, it shall be possible to postpone tenders if efficient distribution of electricity cannot be guaranteed in case of missing or insufficient offshore connection lines.
In the various statements published by the Federal Ministry for Economic Affairs and Energy, most stakeholders agreed on the crucial points: Above all, manufacturing and operating companies criticised the initially envisaged method of a second bid component. However, these companies are probably not particularly satisfied with the current lottery procedure either. In their statements, many of the companies pleaded for so-called "contracts for difference" [“Differenzverträge”]. Here, a certain feed-in-tariff for the electricity would have been fixed in advance. If this amount is not reached, the operating companies receive the remaining amount as a subsidy. If, conversely, the agreed tariff is exceeded, the difference must be refunded.
This procedure is supposed to keep the risks for the operators as low as possible, since this would have allowed them to plan with fixed revenues. In addition, according to the stakeholders, the procedure would also promote competition and support a rapid expansion. Many companies also considered the “contracts for difference” to be the most economically sensible solution, especially because this method is already applied successfully in other European countries. Only one of the statements disagreed, arguing that “contracts for difference” could not cover all risks anyway and further do not sufficiently promote competition.
Environmental organisations, on the other hand, did not criticise the award procedure, but above all the plans for the future enshrined by the Act. The organisations feel that environmental protection is not given enough consideration in the planned projects and demand a commitment to nature compatibility, especially in the area planning of the wind farms. The projects now being considered would take up too much habitat from the already severely impaired marine ecosystem. According to the environmental organisations, a quantitative expansion target should be rejected. The offshore wind energy installations should be more compact and require as little cable laying as possible.
One of the proposed solutions intended to combine the abovementioned two concerns: in the case of several equally low bids, it was proposed that the decision should not be made by lottery or through a second bid component, but rather it should be examined which company could realise the project in the most environmentally friendly or the fastest way.
It is also worth noting a decision of the German Federal Constitutional Court rendered in June this year. According to this decision, the Offshore Wind Energy Act has a partially unjustified retroactive effect for companies that already carried out examinations and planning in the Exclusive Economic Zone at their own expense on the basis of the previous legal situation. The new Act made these obsolete and declared them to be terminated even though the companies concerned had already invested several million euros. According to the German Federal Constitutional Court, these companies must now be compensated. The Act as such is not null and void, however, the relevant area must be redrafted.
In summary, the new tendering procedure and the new fixed gigawatt target are probably the biggest and most influential amendments within the Offshore Wind Energy Act.
Overall, however, there is much room for improvement in various aspects. In particular, the lottery procedure rather seems like a provisional solution. A change to this procedure in 2022 would in any case be worth considering, as was also recognised by the Act itself. Further, the Act can currently neither offer the most economically sensible option nor can it guarantee environmental protection. It remains to be seen what further innovations the revision in 2022 will bring.