April 18, 2019

The German Offshore Wind Act – what’s new

Offshore wind energy production has been an ever-growing business in Germany for the last few years. The German government was keen to subsidise the business in order to reach their goal to eventually switch to renewable energy sources as Germany’s sole power source.

However, over the last few of years and with the introduction of the newest amendment to the applicable law (“Gesetz zur Einführung von Ausschreibungen für Strom aus erneuerbaren Energien und zu weiteren Änderungen des Rechts der erneuerbaren Energien”, abbreviated „EEG“), these subsidies have been gradually reduces in order to manage the growth of the industry.

With the additional introduction of the separate Offshore Wind Act (“Gesetz zur Entwicklung und Förderung der Windenergie auf See”), also referred to as “WindSeeG”, not only is there an annual cap on construction permits but also a competitive auction system favouring operators offering to sell their wind power at the lowest price.

More than two years after its introduction, the transitional period of the Offshore Wind Act has passed and the so-called central model of the auction system is now fully in place. In the following, we will shortly describe this central model and the expected developments due to the outcome of the two auction rounds during the transitional period.

The auction system under the central model

The fully implemented central model provides that prospective developers of an offshore wind park must bid against other potential investors in order to receive a planning permission. The German Federal Maritime and Hydrographic Agency (“Bundesamt für Seeschifffahrt und Hydrographie”), also referred to as “BSH” will conduct its own preliminary site investigations and suitability testing, before approving a certain site or area in the North or Baltic Sea for the planning of an offshore wind farm. Approved sites will be included in the auctions, with an annual capacity to be auctioned of 700 to 900 MW (no more than 840 MW on average).

Bidders will need to specify for what capacity amount they are bidding, but the actual bidding is made on the “reference value”, i.e. the base amount for the guaranteed grid supply compensation. The bidder with the lowest reference value bid will receive the auction award. If two or more bidders make this lowest reference value bid, the bidder with the smaller capacity bid will receive the award.

In order to place a valid bid, the bidder must also provide a guarantee in the amount of 200 EUR per kW capacity that he is bidding for. This must be a bank guarantee or a deposit, but company or parent company guarantees will not be accepted. This guarantee means to secure potential penalty payments, which become due if the successful bidder misses the statutory milestones during the construction process of the wind farm. Such milestones include the 12-months’ time limit after the award was granted to hand in the planning documents as well as the 18-months’ timeframe starting with the planned completion date until the actual technical availability of at least 95 % of the turbines. The penalties for missed milestones can amount to up the full amount of the provided security.

The successful bidders still have to apply for a planning permission and will need to perform their own subsoil and UXO surveys. While awards cannot be transferred to other projects, an award including the project itself and any already existing permits may be transferred to a third party.

Once an offshore wind farm is erected and commissioned, the Offshore Wind Act provides only for a 25-year period of operation rights. At the end of this period, the site may be re-auctioned or assigned to a different purpose. Also, at the time of the application for a planning permission, the developer must already agree that he will transfer all rights to the wind farm to a potential subsequent user without compensation, should this be required by law at the end of the 25-year period.

Consequences of the transitional period

For already existing projects, there was a different set of rules during a transitional period for two rounds of auctions during 2017 and 2018. These auctions resulted in much lower reference values that originally expected. During both auction rounds, bids with a zero reference value were successful. This has a significant impact on the auction system of the central model: according to Sec. 22 para 2 of the Offshore Wind Act the maximum reference value for bids under the central model is the lowest successful reference value during the transitional period. Consequently, if Sec. 22 para 2 remains unchanged, only bids with a zero reference value may be considered during future auctions, which was most likely not anticipated by the legislative when the Act was passed.

While Sec. 22 of the Offshore Wind Act also allows the Federal Network Agency to determine a lower or higher reference value than the one resulting from the first two auctions, it remains to be seen whether and how such right will be executed. Even if such right would be used, it will most likely require another change in the law since presently an increase of only 10 % on top of the reference value as per Sec. 22 para 2 is allowed. However, zero plus 10 % is still zero.

Outlook

The new Offshore Wind Act brought significant changes to the offshore wind industry in Germany. Developers have been forced to be much more competitive and although it is the purpose of the German government to encourage energy and cost efficiency of offshore wind power, the effect of the Offshore Wind Act also was a decline in the number of new projects to be developed each year. Many developers have complained that the German government has restricted the previously booming industry just because the development of the grid could not keep up due to a lack of commitment to this new infrastructure.

Industry groups continue to lobby the German government for a more ambitious project development capacity for the next auctions in the central model and since such auction will only be in 2021, there is still time to reconsider. Apart from the capacity to be auctioned the German government will, however, have to consider how to deal with the reference value cap at zero. If the law remains unchanged and all bidders have to make reference value bids of zero, there is only one criterion left to determine the winning bid, which is the bid capacity. In a case where more than one bidder have the same smallest bid capacity, which is very likely, the winning bid is drawn by lot. But luck is hardly the best way to choose the most efficient bid and was certainly not envisioned as the main criterion in an auction system when it was introduced.

Consequently, it remains to be seen whether and which further changes to the auction process will be introduced.