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Out-Law Analysis 4 min. read

Germany drops contracts for difference from amended Wind Energy at Sea Act

Wind turbines on the ocean offshore wind-LinkedIn

The German parliament has adopted amendments to the Wind Energy at Sea Act – but without the originally planned contracts for difference (CfD) for new projects.

On Thursday, before the parliamentary summer recess, the German parliament adopted the second amendment to the Wind Energy at Sea Act (WindSeeG). However, in contrast to the first draft law, CfDs have not become part of the new law. Instead, new award criteria have been introduced, which are primarily aimed at protecting the European production industry.

CfDs would have been a good way to improve investment security in times of geopolitical uncertainty.

The amendment of the WindSeeG is intended to accelerate the expansion of offshore wind energy. This amendment has already been introduced through the federal government’s so-called "Easter Package" aiming at, among other things, increasing the installed capacity of offshore wind turbines to at least 30 gigawatts by 2030 and at least 40 gigawatts by 2035. By 2045, at least 70 gigawatts are to be installed.

CfDs cancelled at the insistence of the liberal Free Democrats

The amendment that has now been adopted no longer includes the possibility of tendering centrally pre-examined areas via CfDs. These would have been a good way to improve investment security in times of geopolitical and market uncertainty. According to media reports, the change was made at the insistence of the liberal Free Democratic Party (FDP), one of the coalition partners in the federal government. It sees CfDs as "a state-private price cartel at the expense of competition and market integration".

CfDs mitigate the risk associated with price fluctuations by ensuring remuneration at a pre-agreed "strike price". If the electricity price achieved by the wind farm operator on the market falls short of the agreed strike price, the state compensates for the difference. If the electricity price achieved is higher than the strike price, the operator pays the surplus back to the state. An additional profit or "surplus profit" is thus excluded.

Exemption planned for industrial power contracts

However, an ordinance authorisation provided for in the amendment can at least secure industrial electricity prices by means of CfDs. Under a corresponding ordinance – which has yet to be issued – operators could conclude long-term electricity contracts with industrial customers at a fixed price, whereby the price would be determined in a competitive tender. If the future market value of the electricity is lower than the contractually guaranteed value, the difference would be paid by the state to the operator. If the electricity price is higher, the operator would have to distribute the surplus to the state.

Second bid component remains

Since CfDs have now been deleted from the law, operators may instead be required to pay a so-called "second bid component", as already provided for in the current law. This is a kind of "entrance fee" that bidding operators pay to the state in order to be awarded the contract for an area. This second bid component becomes relevant if – as is already customary – the bidders in the first bid component want to completely waive state subsidies and instead operate the wind farm without state subsidies in the form of feed-in tariffs (zero-cent bids).

Sticking to the second bid component will lead to bidders facing further, artificially generated, price pressure

Decarbonisation and local content become award criteria

However, the amendment also changes the qualitative award criteria for offshore wind farms. For the first time, a "contribution to the decarbonisation of the expansion of wind energy at sea" is called for. This contribution is measured by the use of unsubsidised green electricity or green hydrogen in the entire production process. In addition, a "contribution to securing skilled workers" is envisaged, which primarily refers to the ratio of trainees and unskilled workers to employees subject to social security contributions. Not only the bidder, but also all affiliated companies and subcontractors are covered.

Both criteria aim to protect the domestic market against non-European competition – primarily from China. The aim is to safeguard the European industry and create new jobs. In order to include these two criteria in the law, the FDP’s coalition partners, the SPD and Greens, had long struggled with the FDP. The final regulations are considered to be a compromise, as the SPD and Greens pushed to adopt CfDs.

BNetzA and BMWK can exclude non-European bidders

The aim of the amendment to protect the domestic market is also evident elsewhere. For example, the Federal Network Agency (BNetzA), the body responsible for the tender, may, in agreement with the Federal Ministry for Economic Affairs and Climate Protection (BMWK), exclude bidders from the award procedure if the bidder or its shareholders are "non-European" within the meaning of the Foreign Trade and Payments Act, and an award or subsequent operation of the plant may impact the public order or the security of Germany.

The background to this regulation is the controversial debate (link in German) about an offshore grid connection platform, for which two subsidiaries of a Chinese state-owned company supply the electrical and computer technology. Critics fear that the platform could be easily monitored, deliberately overloaded or shut down, as it does not fall under the IT Security Act and the critical components used in it therefore do not meet the necessary security standards.

Apart from the above, the amendment that has now been adopted is based on the draft law from the Easter package in April. Further changes are:

  • In the case of centrally pre-examined areas, the planning approval procedure is omitted and replaced by a more rapid planning approval procedure.
  • Planning approval and planning approval procedures shall have a pre-determined duration.
  • Environmental assessments and participation rights will be more closely bundled.
  • The technical supervision of the Federal Maritime and Hydrographic Agency is bundled at the BMWK for all tasks in connection with the WindSeeG.
  • In the future, the offshore grid connection can be awarded directly after the area has been included in the land development plan which accelerates the awarding of contracts by several years.
  • Smaller areas for plants with a capacity of 500 MW or more can also be tendered.

State aid approval still pending

The amended WindSeeG is now to enter into force as soon as possible. However, in addition to the proper parliamentary procedure, approval must also be sought under EU state aid law. European Commission state aid approval is planned for the second half of this year, before the first development area can be awarded under the new WindSeeG. Further, the achievement of the offshore expansion requires an update of the site development plan by the end of the year at the latest.

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