Winds of opportunity: Investment opportunities in German offshore wind farms

Under the new regime, project developers will in general no longer receive statutory tariffs as under the current Renewable Energy Act (EEG 2014) regime, but will have to bid for tariffs. Successful bidders will then receive remuneration at the level of their bid ("pay-as-bid") for a fixed period of 20 years. To take account of varying costs, technologies and permitting requirements, specific rules for tender procedures were introduced for each renewable energy source.

The Offshore Wind Act

For offshore wind farms, these rules are, in addition to the EEG 2017, set out in a new Offshore Wind Act (Windenergie-auf-See-Gesetz).  The Offshore Wind Act introduces a new planning regime for offshore wind farms.  Roughly speaking, under this so-called "central model", areas for offshore wind farms will be pre-developed by the state and project developers can bid for projects in these pre-developed areas only.

However, in order to allow for sufficient time for the new planning regime to be implemented and to take reasonable account of offshore wind farm projects which have already reached an advanced stage under the existing planning regime, the central model only applies to projects which will be commissioned from 2026, with tender procedures starting in 2021.

Before the new regime kicks in, all projects which have already been permitted and hold grid connection capacities and which will be commissioned by the end of 2020 are still eligible for the statutory tariffs under the EEG 2014 regime.  In addition, there will be two early tender rounds in 2017 and 2018 for "existing projects", as further defined in the law.

The expansion of offshore wind farms is limited to 15,000 MW until 2030 under the EEG 2017.  While this target has not been reduced compared to the former regime, the target capacity has been allocated to certain time periods in order to ensure a continuous, planned expansion of offshore wind farms in line with the necessary building of grid connections.

Investment opportunities

For investors seeking to identify upcoming investment opportunities, it will be important to know which projects qualify for the existing statutory tariffs (first group) and which projects are eligible as so-called "existing projects" to participate in the first two early tender rounds in 2017 and 2018 (second group), as these projects have a chance to be realised in the near future until 2025.

The projects belonging in these two groups are identified in tables 1 and 2 below,¹ setting out for each of the projects their current owners and status as well as their location and capacity.  All other offshore wind farm projects are referred to as the "third group", as discussed below.

First group: projects eligible for statutory tariffs (7,700 MW)

Offshore wind farms which:

• have either received grid connection capacities from the German regulator, the Federal Network Agency (Bundesnetzagentur), or which have received grid connection commitments from the responsible grid operators before 1 January 2017; and

• will be commissioned by the end of 2020,

do not have to participate in tender procedures.  These projects remain eligible for statutory tariffs and the tariffs under the EEG 2017 largely reflect the situation under the former EEG 2014.

The projects in this group add up to a total capacity of almost 7,700 MW.  This figure includes 947 wind turbines with a total capacity of about 4,100 MW which were already operational as of 31 December 2016.  In addition, wind turbines with a capacity of 1,486 MW are currently being built.  A final investment decision has been taken for further wind turbines with a capacity of 1,200 MW.  For wind turbines with a capacity of around 1,100 MW, a final investment decision has not yet been taken.² 

German offshore wind performance as of 31 December 2016

In table 1, we list those projects which are either in the construction or the pre-construction stage (excluding those projects which have already been commissioned or which are already installed).

Second group: two tenders in 2017/2018 for "existing projects" (3,100 MW)

Two early tender rounds will take place on 3 April 2017 and 1 April 2018 for projects to be commissioned in the period between 2021-2025.  These projects are not eligible for statutory tariffs any more, and instead have to bid for tariffs in public tenders.

The aim of the two early tender rounds is, amongst other things, to give developers of projects which have already reached an advanced stage of development before the changes were introduced the possibility to still realise their projects outside of the new central model.

Therefore, only so-called "existing projects" are eligible to participate in these tenders.  These are defined as projects which:

• have been permitted or which have undergone a public hearing (Erörterungstermin) before 1 August 2016;
• for which the permitting authority confirms that the permit is valid or that a permit is likely to be granted; and
• are located in clusters 1-8 of the offshore grid development plan for the German North Sea or in clusters 1-3 of the offshore grid development plan for the German Baltic Sea.

The volume of the two early tenders is limited to 1,550 MW per tender round (3,100 MW in total).  With regard to the commissioning dates of the projects, the volumes are mainly allocated to the single years between 2021 and 2025 on the basis of the timelines for grid connections to be built as set out in the German offshore grid development plan³ as follows:

• 202182022: 500 MW per year; in 2021, the 500 MW capacity is reserved to projects in the Baltic Sea only.⁴
• 2023-2025: 700 MW per year.

As can be seen in table 2 below, projects which qualify as "existing projects" have a volume of around 6,400 MW and more than double the limit of 3,100 MW. Investors must therefore consider that there will likely be significant competition already in these two tenders leading to a pressure on prices.  This situation should be taken into account when choosing investment targets as well as when considering to team up with a current owner or developer.  Furthermore, the offshore grid development plan and the projected grid lines and connection capacities on these lines (as well as potential scarcities on single lines) need to be taken into consideration.

"Entry right" for later tenders

To address the issue of insufficient capacity for all "existing projects" as well as legal concerns relating to the withdrawal of rights of other existing projects, existing projects which have been unsuccessful in both tender rounds in 2017/2018 are granted a so-called "entry right" (i.e. a step-in right) for the later tenders under the central model.  This means that the unsuccessful projects can "enter" or "step" into successful bids of other bidders (in the same location as the earlier unsuccessful bid) under the central model for the period after 2026 if certain further conditions are met. 

Table 1: Projects eligible for feed-in tariffs in construction/pre-construction phase as of 1 September 2016

Table 2: Projects eligible for participation in two early rounds of tender in 2017/2018

Capacity in early tenders vs. eligible "existing projects"

Rules for the tender procedures

The EEG 2017 and the Offshore Wind Act set forth a number of rules for the tender procedures which investors need to be aware of when deciding to purchase a project or to team up with a current project owner or developer.  These rules include the following:

• the two early tender rounds in 2017/2018 must be published at least eight weeks before their respective dates on the homepage of the Federal Network Agency;
• the publications will, among other things, contain information on the tender deadlines, the tender volumes, the grid connection capacities, the year in which the grid connections are planned to be in place as well as the formal requirements for bids;
• a statutory price ceiling of 12 ct./kWh will apply for the projects participating in the two early tender rounds.  Bid prices are expected to be significantly below this ceiling;
• bids can be structured by using bands for which a certain price applies (Mindestgebotsmenge) as well as secondary offers at a higher price for a lower amount of installed production capacity (Hilfsgebot) in order to avoid an unsuccessful bid due to a scarcity situation;
• cash deposits or bank guarantees at an amount of 100 EUR/kW of the capacity to be installed must be provided to the Federal Network Agency before the tender deadlines.  These deposits serve the aim to secure a timely realisation of projects in case a project wins a bid and certain penalties become due if statutory milestones are not met.  There are no specific rating requirements for the guarantees;
• tenders will be awarded on the basis of price up to the maximum volumes in each round of tender year (1,550 MW) and the available grid connection capacities.

Third group: Tender procedures under the central model (4,200 MW)

For projects commissioned between 2026 and 2030, tender procedures will take place under the "central model" with a first tender round on 1 September 2021. Under this new regime, the authorities will pre-develop areas for offshore wind farms.  Tenders will then be run with regard to pre-developed sites only.   After a successful bid for a tariff, the developers have the right to apply for a permit for the building and operation of the wind farm.

The tender volume for the period 2026-2030 totals 4,200 MW with 840 MW per year on average.  There will be a price ceiling for these tenders determined on the basis of the lowest successful bid in the second early tender round in 2018.

1. The tables have been prepared on the basis of publicly available information and may therefore not be fully accurate.
2. Deutsche Windguard, Status Offshore Wind Expansion in Germany, December 2016.
3. The offshore grid development plan 2025 (Offshore-Netzentwicklungsplan/O-NEP) has been confirmed by the Federal Network Agency on 25 November 2016 and is available on the homepage of the Agency.
4. The background for this rule is an existing delay of grid connections in the North Sea.
5. Note: Figure includes about 270 MW already commissioned in wind farms Gode Wind 1 and 2.