Germany: Energy Briefing February 2014 Contents Introduction 01 1. Amended Remuneration 02 2. Compulsory Direct Marketing 03 3. Tender Procedures 04 4. Self Consumption, Support for 04 Energy Intensive Industries 5. Transitional Provisions 05 6. Outlook 05 Revision of the Renewable Energy Sources Act Key elements of the working draft Last year s parliamentary elections in Germany resulted in a new coalition between the two main political parties CDU/CSU (Christian Democrats) and SPD (Social Democrats). Energy reform ranks relatively high on the new Government s agenda. The coalition speaks of three aims of equal priority, represented as a triangle of climate protection and conservation of the environment, security of supply, and affordable energy prices. The Federal Government sees a revision of the Renewable Energy Sources Act (Erneuerbare Energien Gesetz, EEG ) as a key element of the intended energy reform. Contacts 06 On 10 February 2014, a first working draft (Referentenentwurf) of proposed amendments to the EEG became available. This draft largely follows the key points of the intended reform which were resolved by the Federal Government in January 2014 and set out in the key points paper, published in the same month. The next steps are currently planned as follows: The Federal Government aims to adopt the bill in Cabinet on 9 April 2014. The first debate in the Federal Council (Bundesrat) is scheduled for 23 May 2014, to be followed by debates in Parliament (Bundestag) in May and June. The new EEG is planned to enter into force on 1 August 2014. As the revision is likely to be the subject of intense political debate, the proposed timeline seems rather ambitious and may still change. The draft retains some core elements of the current EEG: Grid operators will still be obliged to connect renewable energy plants to the grid, to offtake the electricity and to prefer renewable energy plants in the event of grid bottlenecks. The draft law also in principle maintains the obligation for grid operators to pay feed in remuneration for a period of 20 years plus the year in which the plant is first commissioned. However, the draft also introduces a number of changes to the current feed in tariff system, the most important of which are summarised below: wfw.com The compensation rules for several renewable energy sources will be amended. We describe the intended amendments to the
02 GERMANY: ENERGY BRIEFING remuneration systems with a special focus on onshore and offshore wind (1). Direct marketing becomes compulsory (2). The draft mentions the intention to determine support levels by way of tender procedures in the future. This system will first apply to open space PV plants (3). Owners of plants who produce electricity for their own consumption will be subject to the EEG surcharge. Advantages for industries with high consumption will likely be lowered (4). Transitional provisions intend to ensure that operators and investors legitimate expectations are protected (5). 1. Amended Remuneration Rules Onshore Wind As in the case of the existing rules for PV plants, the degression of the feed in value for electricity generated from onshore wind will depend on the amount of new onshore wind capacity added in the relevant review period, with the aim of achieving an increase of up to 2,500 megawatts per year within a corridor of 2,400 to 2,600 megawatts per year. In detail: An initial high feed in value, as a starting point set at 8.9 Ct./kWh, will be achieved during the first five years after commissioning. The duration of this initial high value period may ultimately be longer, depending on the yield of the relevant plant. The actual energy yield of the relevant turbine is related to a so called Reference Yield, which is a reference energy yield defined according to turbine type and hub height. According to the draft law, for each 0.6% a wind turbine falls short of 130% of the Reference Yield, the entitlement to the high feed in value is prolonged for one month. In addition, the entitlement to the high feed in value is prolonged by one more month for each 0.19% the wind turbine falls short of 95% of the Reference Yield. After expiry of the initial high feedin value period, a basic feed in value will apply, which is set at 4.95 Ct./kWh as a starting point. We note that the reference yield model differs from the Government s initial intentions set out in the key points paper which was published in January 2014: Originally, it was intended to provide for an extension of the high value period on a linear basis between 130% and 77.5% sites, instead of the two step model which is now envisaged. Wind turbine sites which on average achieve approx. 95% of the Reference Yield might have been better off with a linear model. Starting from 2016, the feed in values will be adapted quarterly. In principle, the feed in values will be reduced by 0.4% on 1 January, 1 April, 1 July and 1 October of each year. However, the degression rate will take the total capacity expansion of onshore wind into account. If the annual target corridor of 2,400 2,600 MW is exceeded in the relevant reference period (for comparison: new installed capacity was 2,415 MW in 2012 and 2,085 MW in 2011; source: BWE website), the degression rate for the relevant quarter increases, up to a maximum of 1.2%. Should the amount of new onshore capacity be lower than the corridor, the degression rate would decrease and a positive degression, i.e. an increase of the feed in value, could even be possible. The Federal Network Agency (Bundesnetzagentur) will monitor the generation capacity and will publish the relevant figures and the resulting feed in value rates. Various details of this flexible cap will need to be refined in the legislative process, including how repowering (replacing old installed capacity with new capacity) is accounted for. The repowering bonus will be abolished. The system services bonus (which was in any case set to expire at the end of 2014) will also be phased out.
GERMANY: ENERGY BRIEFING 03 Offshore Wind Offshore wind generation capacity is intended to reach a total of 6.5 GW by 2020 and 15 GW by 2030. Different from onshore wind, the feed in value will not depend on the amount of capacity increase in a reference period. Rather, the intention is to achieve a steering effect by amending the rules on grid connection. In detail: An initial high feed in value, as a starting point set at 15.4 Ct./kWh, will be achieved during the first 12 years after commissioning. The duration of this initial high value period may be longer, depending on the distance from shore and the water depth at the place of installation, as is the case under the current EEG. After the high value period, a basic compensation of 3.9 Ct./kWh will be payable for the remainder of the remuneration period. As is the case in the current EEG, operators may opt for the so called compression model, which provides for a higher feed in value of 19.4 Ct./kWh during a period of eight years. The compression model will be available for offshore wind farms commissioned before 1 January 2020 (instead of 2018 as provided in the current EEG). Starting from 2018, the initial feed in value will annually decrease by 0.5 Ct. in the basic model. The degression in the compression model will be 1.0 Ct./kWh. This difference is structured to keep the basic model attractive for investors. The draft law provides for changes to the grid connection rules in the Energy Industry Act (Energiewirtschaftsgesetz, EnWG ) with the aim of limiting the capacity increase to the intended targets. To this end, the Federal Network Authority will only be permitted to allocate a total grid connection capacity of 6.5 GW until the end of the year 2020 (which target capacity was also previously held to be the realistic magnitude by market participants). Starting from 2012, an additional annual grid connection capacity of 800 MW will be allocated. If more wind farms request a grid connection, the capacity may be auctioned or allocated in another type of procedure; details are not yet defined. Photovoltaics Generation capacity from solar energy is to increase by approximately 2,500 megawatts per year within a corridor of 2,500 to 3,500 megawatts per year. The flexible cap scheme will continue to apply. There is no intention to reduce the current feed in tariff figures. 2. Compulsory Direct Marketing As a general rule, electricity from renewable energy sources shall be sold by way of direct marketing, unless the plants are expressly entitled to receive a feed in tariff. Any exception from the direct marketing obligation, i.e. an entitlement to a feed in tariff, applies to small plants. The capacity threshold will also gradually be lowered in order to provide for better market integration of smaller plants. The following installations will be required to sell their electricity directly: plants with a capacity of at least 500 kw which are first commissioned before 1 January 2016, plants with a capacity of at least 250 kw which are first commissioned on or after 1 January 2016, plants with a capacity of at least 100 kw which are first commissioned on or after 1 January 2017. Watson, Farley & Williams February 2014
04 GERMANY: ENERGY BRIEFING Direct marketing will see the operator receiving a market premium. The market premium will be the difference between (i) the (hypothetical) feed in tariff (anzulegender Wert, feedin value ) and (ii) the average price at the electricity exchange EPEX Spot SE in Paris for the relevant month and for the relevant type of renewable energy. There will no longer be an additional management premium. To lower the risks of mandatory direct selling, plant operators are entitled to a feed in tariff as a fall back solution in case in exceptional circumstances, they are temporarily unable to sell their electricity directly. Any such feed in tariff will, however, only amount to 80 percent of the feed in value. Both the claim for a market premium and for the fall back feed in tariff require that the plant can be controlled remotely by the direct marketing contractor or another purchaser of the electricity. This means that remote control must be technically possible with a view to reducing the amount of electricity and that the direct marketing contractor or any other purchaser must also be contractually entitled to actually control the plant. 3. Tender Procedures The draft law mentions the intention that the level of support for renewable energies should be determined by means of competitive tendering from 2017 onwards. However, so far this has only been an expression of political intent and the draft law does not yet contain specific rules in this regard, with one exception: For open space photovoltaic plants a tender procedure will be introduced as a pilot project, in order to collect experience with such procedures. The procedure will be run by the Federal Network Agency. Details of the tender procedure will be specified in an Ordinance (Verordnung) following the reform of the EEG. It is intended that, once a bidding procedure has been put into place, a feed in remuneration will only be available for those plants that are awarded this support in the tender process. This will occur seven months after the Federal Network Agency has initiated the first tender process. 4. Self Consumption, Support for Energy Intensive Industries The feed in remuneration payments made by the grid operators are passed to the end customers. The payments ultimately due from the end customers are known as EEG surcharge (EEG Umlage). Currently, the EEG provides that producers which consume their own electricity are exempt from the EEG surcharge if the electricity is not conducted through the grid or is consumed in the immediate vicinity of the generating plant. It is intended to reduce this privilege to a discount on the EEG surcharge. According to the Government s key points paper, where there is self supply from new plants with a capacity of 10 kw or more, 90% of the EEG surcharge will be payable for conventional plants and 70% in the case of renewable and combined heat and power plants. The draft law as it stands indicates that the rules on self consumption will be amended, but does not yet contain the relevant details. The electricity generated and consumed by the power plants themselves will be exempted. The EEG currently further provides for reductions of the EEG surcharge in favour of energy intensive companies. It is intended to reduce the reductions available for energy intensive companies. However, details are not yet contained in the draft in view of ongoing negotiations with the EU Commission which is investigating whether or not the current rules infringe the European state aid rules.
GERMANY: ENERGY BRIEFING 05 5. Transitional Provisions In principle, it is intended that the amended EEG shall apply as of 1 August 2014. However, transitional provisions intend to protect the legitimate interests of operators. To ensure that operators and investors legitimate expectations are protected, the EEG as in force on 31 July 2012 will continue to apply for plants that are first commissioned before 1 January 2015, provided that any operating permits for such plants required under Federal law were obtained before 23 January 2014. For other plants first commissioned before 1 August 2014, the new law in principle applies, but with important exceptions: the requirements and, especially, the feed in tariffs which applied at the date of first commissioning shall continue to apply. Also, the right to choose between direct marketing and the feed in tariff will remain unchanged for such plants. 6. Outlook The draft revision of the EEG still implies a political commitment to the energy turnaround, namely the long term switch from nuclear and fossil energy to renewable energies. However, the support mechanisms for renewable energies will become more complex, more market oriented and further tailored towards mitigating the cost implications for the end consumer. In view of the planned transition periods, it is advisable to make an effort to achieve first commissioning in time to ensure that the plant can still benefit from the current rules. It should be noted that a number of details will only become clear as the legislative process progresses or even after the reform, where details may be regulated in ordinances or determined by the Federal Network Agency. Furthermore, this intended reform of the EEG does not yet address the issue of integration of renewable energies into the grid, which is expected be addressed in a future reform of the EnWG. Watson, Farley & Williams February 2014
06 GERMANY: ENERGY BRIEFING Contacts Should you wish to discuss any of the matters raised in this briefing, please speak with a member of our team below, or your regular contact at Watson, Farley & Williams: Dr. Malte Jordan Partner Hamburg mjordan@wfw.com +49 40 800 084 0 Dr. Christine Bader Senior Associate Hamburg cbader@wfw.com +49 40 800 084 0 Dr. Ivana Mikešić Partner Frankfurt imikesic@wfw.com +49 69 297 291 0 All references to Watson, Farley & Williams and the firm in this brochure mean Watson, Farley & Williams LLP and/or its affiliated undertakings. Any reference to a partner means a member of Watson, Farley & Williams LLP, or a member of or partner in an affiliated undertaking of either of them, or an employee or consultant with equivalent standing and qualification. This brochure is produced by Watson, Farley & Williams. It provides a summary of the legal issues, but is not intended to give specific legal advice. The situation described may not apply to your circumstances. If you require advice or have questions or comments on its subject, please speak to your usual contact at Watson, Farley & Williams. This publication constitutes attorney advertising. Watson, Farley & Williams 2014 100 000 2436 HAM KW KW 26/02/2014 wfw.com