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Germany enters rough waters

With more than 2GW of projects under construction and high-level political support, it seems that Germany’s fledgling offshore wind industry is finally taking off.

The Merkel government sees the sector as one of the main pillars of Germany’s transition away from nuclear power, targeting 10GW by 2020 and 25GW by 2030. And with more than 37GW in the pipeline, it would seem that these targets should be easily hit.

Yet many industry experts are now saying that only 6-8GW will be installed by 2020.

How can this be? Even the UK, with its smaller industrial base, is on target to deliver 15GW of new projects by then.

The answer is that the development of the German offshore sector is taking place in a very different way, with developers facing a different set of obstacles. Project locations, grid-connection, finance, permitting and politics have all provided their own unique headaches.

Many of these stem from an early decision to build most of Germany’s offshore wind farms a long way from the coast — out of sight from the mainland and far from environmentally protected areas.

These deep-water locations make construction and grid connection much more expensive and challenging than, for instance, the UK’s shallow-water Round 1 and 2 projects.

“I assume that most of those involved underestimated the complexity of such large projects,” says Thomas Meerpohl, chief financial officer of the Global Tech 1 offshore wind farm.

Grid connection has proved especially problematic.

The task of building the offshore high-voltage direct-current (HVDC) lines and converter platforms needed to connect the projects to the onshore grid was given to the local transmission system operators (TSOs). When Dutch TSO TenneT took over the local network along the German North Sea coast in 2010, it massively underestimated the costs of these connections and, until recently, encountered major difficulties in financing them.

Consequently, most of these links have suffered severe delays — meaning that some projects would be scheduled to be completed a year or more before they would be able to export power.

Not only did this destroy project economics, but it scared off investors — and TenneT was faced with a potential wave of multi-million-euro lawsuits from offshore developers.

TenneT has tried to shift some of the blame for the delays to the companies it hired to build the first couple of grid connections, such as Siemens. Siemens admits that the maximum 36 months it had set aside for the construction of the first link was too short. “We underestimated the manpower requirements, the know-how, the standards that had to be met and the approval process for this project,” admitted Siemens Transmission Solutions chief executive Tim Dawidowsky.

To jump-start the stalled and worried industry, Germany’s parliament passed legislation in December that capped TSOs’ liability to €17.5m ($22.7m) in most cases.

Industry observers believe this will allow pension funds, insurance companies and other investors to begin pouring capital into the sector. Indeed, in January, TenneT sold 49% stakes in four offshore grid links to Japan’s Mitsubishi for €576m. And TenneT told Recharge in late February that it was in “active talks” with further potential investors.

Yet this reduced liability for TSOs may backfire spectacularly.

A

ny future compensation owed to developers above the TSOs’ legal limit would have to be paid by consumers via a new supplement on their electricity bills. The current renewables surcharge on consumers’ bills, which pays for the country’s feed-in tariff (FIT), is already high, causing a heated debate in Germany about the affordability of renewables and the entire energy transition.

Offshore wind’s effect on the FIT has so far been negligible, as only 280MW has been installed. But that could change once several gigawatts are completed, as FIT payments for offshore wind amount to €0.19 per kWh (for the first eight years of a wind park’s existence if operation starts before the end of 2017).

Gernot Blanke, chief executive at developer WPD — which recently secured funding from a consortium of banks for its 288MW Butendiek offshore project (the first to do so in 18 months) — says he does not think much further project financing will be agreed before 2014 or 2015.

Many developers believe that after the current 3GW wave of projects is built, there will be a lull, or “dent”, in new developments.

“The dent to a certain degree came due to the uncertainty we had in the market in regards to delayed grid connections,” Blanke explains.

These delays also led to some developers postponing projects.

Dong Energy put its 300MW Borkum Riffgrund 2 project on hold last October because the required grid link would not have been in place in time. Similarly, in November, EnBW postponed its investment decision on its 500MW Hohe See project, citing regulatory uncertainty and the lack of a firm grid-connection date.

The new legislation on TSOs’ liability was supposed to remove the uncertainty and lead to a new wave of projects. “Investors and banks were willing to invest again,” explains WPD Offshore managing director Achim Berge. “But then [environment minister Peter] Altmaier and [economics minister Philipp] Rösler came up with their proposals.”

As part of their plans to reduce the costs of renewables for consumers, the ministers have proposed a five-month moratorium on FIT payments for new installations and the speeding up of planned FIT reductions. This has added to the existing uncertainty about what sort of support regime will be in place post-2017, when many projects now at the planning stage are due to be completed.

“No offshore project can be financed until these proposals are completely off the table,” says Berge. “No investor will sign anything as it is completely unclear on what economic basis future projects would be paid for later. And we’re not talking small amounts. Total investments for current German offshore projects top €1.3bn per wind park. Those are gigantic sums — you need investment security.”

Manufacturers are already feeling the effects of this “dent”. Turbine maker REpower has no production scheduled from German offshore orders beyond this summer, admits Norbert Giese, its vice-president for offshore development.

The company is in the process of scaling down the workforce at its Bremerhaven blade factory to about 300 — from roughly 700 last year — as a direct result of EnBW’s Hohe See delay. As Giese, left, says: “If no big rotor blades are being built [for big offshore turbines], then we won’t need the people that manufacture them.”

The dent could kill off some of the estimated 14,000 jobs in Germany’s offshore wind industry.

Yet despite this, Altmaier is also demanding an overall drive to cut the costs of offshore wind.

German electricity giant E.ON says it aims to bring down offshore costs 40% by 2015 — but many in the industry have dismissed this as wishful thinking.

“We have lost one and a half to two years through the uncertainty about grid connections,” says Lars Thaaning Pedersen, Dong Energy’s vice-president for markets and asset management. “There is no cost-reduction potential if there is no industry. You need to build up volume before you can lower costs.”

Berge agrees. “We need more and more projects. If you just choke off the market now, others that have thought about developing competing equipment will think twice.”

Yet the environment ministry’s belief that costs will come down is so strong that it is considering slowing down the increase in offshore capacity, because projects will be cheaper in future. The expensive learning curve for offshore wind should perhaps take place in other countries first, such as the UK, it suggests. But many disagree.

The UK’s knowledge has so far stemmed from shallow-water, near-shore projects. Its deep-water Round 3 zones are due to be built after many of Germany’s far-shore projects, points out Annette Schmitt, a director at KPMG. “We [in Germany] are the learning curve,” she says. “If we slow down now, nothing will happen.”

It may seem paradoxical, but many developers believe that the biggest threat to German offshore is the same politicians who are in charge of the energy transition and the push for offshore wind.

As Berge says: “If these [FIT] proposals were to become law... then there won’t only be a dent, there simply won’t be any further projects.”

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