German government agrees significantly increased offshore wind targets

On 3 June, the German Government agreed on draft legislation to significantly increase offshore wind targets to 20 GW installed capacity by 2030 and 40 GW by 2040. In comparison, the current law contains an offshore wind target of 15 GW for 2030 and no target for the time thereafter. In order to reach these very ambitious targets, the Government proposes in the draft legislation further far-reaching changes to existing legislation for offshore wind farms.

Background

Offshore wind farms were, like other renewable energy sources in Germany, originally subsidised by statutory tariffs under the German Renewable Energy Sources Act (Erneuerbare-Energien-Gesetz - EEG). In 2017, in order to comply with EU requirements, Germany introduced competitive tender procedures to determine the projects eligible for tariffs and the amount of tariffs for each project. In addition, maximum expansion targets were set as well as price ceilings for the tenders.

For German offshore wind farms, a specifc regime was introduced in 2017 by the then new Offshore Wind Act (Windenergie-auf-See-Gesetz - WindSeeG). Under this regime, a so-called 'central model' was introduced, where areas for offshore wind farms will basically be pre-developed by the state and where project developers can bid for projects on the pre-developed areas only. However, in order to allow for sufficient time for the new planning regime to be implemented and also to cater for certain grandfathering aspects, the central model was only introduced for projects which will be commissioned from 2026 onwards, with first tender procedures for tariffs starting in 2021.

Before 2021, for projects which had already reached a certain advanced development stage, two early rounds of tenders took place in 2017 and 2018 for a total volume of 3,100 MW installed capacity. Both tender rounds saw zero bids, i.e. some project developers handed in bids for a zero subsidy. This was a ground-breaking result in light of the previous statutory tariffs of up to 194 EUR/MWh. Furthermore, as there was still significant potential for offshore wind projects which had not received awards in the two early rounds of tender, calls from the industry to lift the offshore wind cap of 15 GW by 2030 were manifold.

Main content of the draft legislation

In autumn 2019, the German Government agreed the German Climate Protection Plan 2030 (Klimaschutzprogramm 2030). This plan, inter alia, sets forth a share of 65% of renewables in total electricity consumption by 2030. As one measure to reach the 65%-target, the Climate Protection Plan envisages an increase of offshore wind to 20 GW by 2030. The newly introduced draft legislation now aims at implementing this specific measure under the Climate Protection Plan.

According to the Draft Act to Amend the Offshore Wind Act (in the following the "Draft Amendment Act"), the previous target of 15 GW by 2030 is now increased to 20 GW. Furthermore, the Draft Amendment Act for the first time introduces a target of even 40GW by 2040.

In order to enable the realisation of such targets, the Draft Amendment Act contains a number of further changes, inter alia:

• Increase in auctioned capacities: Areas for offshore wind farms will be pre-developed so that in each yearly auction starting from 1 September 2021, areas can be auctioned for offshore wind farm developments with a capacity of 1 GW/year in 2021 through 2023, circa. 3 GW in 2024 and 4 GW in in 2025 (from previously 840 MW/year on average). The auctioned capacities can be handled flexibly and can thus vary from year to year. Furthermore, it is explicitly stated in the Draft Amendment Act that the 20 GW target for 2030 may be exceeded.
• Changes to auction price system: Under the currently still applicable Offshore Wind Act, the lowest bid price in the 2018 auction is the price ceiling for the following auctions. As the 2018 auction saw zero bids for some of the projects, this means that all new offshore wind projects can only bid for zero subsidies under the current regime. The Draft Amendment Act changes this system in two aspects: First, taking into account that not all new offshore wind areas may be developed at zero subsidies, new price ceilings are introduced of 7.3 ct./kWh in 2021, 6.4 ct./kWh for 2022 and 6.2 ct./kWh for auctions from 2023 onwards. Secondly, in case zero bids are handed in for an area by several bidders, a further auction procedure is carried out in which the bidders can essentially offer a EUR price which they are willing to pay in relation to the auctioned area and which is unrelated to the electricity produced by the wind farm later on (i.e. similar to a concession fee). In case a bidder receives an award in this further auction procedure, the offered price is then used as an 'offshore grid connection contribution payment' to finance grid connection costs, payable by the wind farm operator over a period of 15 years in yearly installments.
• Coordination with grid connection capacities: The coordination of the offshore wind build out is more strongly coordinated with the offshore and onshore grid expansion required to transport away the produced electricity. To this end, the auction volume for a certain area or in a certain year must be reduced in case grid operators indicate that either the offshore or the necessary onshore grid connections will not be ready on time. A new "Offshore Controlling" is introduced amongst the federal state, the affected coastal states and the respective grid operators to ensure that further delays in grid connections are then avoided.
• Realisation periods shortened: The Offshore Wind Act sets forth certain realisation periods within which a developer must realise its offshore wind farm project, in order to ensure that projects which have received an award in an auction are actually realised within a reasonable time frame. These realisation periods are in parts significantly shortened under the Draft Amendment Act (e.g. the wind farm must be commissioned within 12 months after the grid connection has been finalised instead of 18 months previously) to ensure a quicker realisation of offshore wind farms. On the other hand, the Draft Amendment Act now also contains the possibility to extend the realisation period once by up to 18 months in case the turbine supplier files insolvency.
• Rules for offshore wind farms not connected to the grid: The Draft Amendment Act contains further rules for offshore wind farms which are not connected to the public grid (e.g. to produce hydrogen by feeding into electrolysis plants).

Whereas the offshore wind industry is applauding the increase in the offshore wind expansion targets, criticism has arisen in relation to the offshore grid connection contribution payment. One argument being brought forward is that the contribution payment would create an incentive to base bids on overly aggressive electricity price assumptions and to thus increase the risk of auctioned projects not being realised later on. It remains to be seen whether the legislator will still react to such criticism.