IN DEPTH: German offshore upbeat

After two years of little demand, a collapse in orders and about 2,000 job losses, the German offshore wind industry is about to be hit by legislation that will slash national targets.

Yet the sector is not howling with indignation — it actually seems more upbeat than it has in years.

The reason for this can largely be summed up with one word: certainty.

Since late 2011, when grid operator TenneT revealed that it was not able to build offshore transmission lines on time, uncertainty has ruled the sector, making investors unwilling to act.

TenneT’s revelation raised the prospect of completed offshore wind farms being unable to send electricity to the grid — and therefore unable to make money. With the Dutch company potentially facing millions of euros in lawsuits for the delays, it could not attract the financing it needed to build the links. Investors in new projects immediately postponed final investment decisions (FIDs) and the sector was largely put on hold.

The issue was not resolved for a year, when Berlin passed a controversial law to cap TenneT’s damages and pass on most of the liability to German consumers through their energy bills.

Then, almost immediately, in February 2013, environment minister Peter Altmaier and economics minister Philipp Rösler announced plans to reduce the country’s feed-in tariffs (FITs). Unsure of what their future returns might be, potential investors pulled out of deals, leaving the sector in limbo once again.

Since early 2013, only one project has received an FID — the €1.3bn ($1.78bn), 288MW Butendiek — which came in the brief lull between the passage of the grid legislation and Altmaier and Rösler’s FIT announcement.

In April this year, the new coalition of Chancellor Angela Merkel’s Christian Democratic Union and the Social Democrats — led by current economics and energy minister Sigmar Gabriel — unveiled a reform to the Renewable Energies Act (EEG), which despite vastly reducing Germany’s offshore ambition, offers long-term visibility for the sector.

The plans, which are expected to be passed by parliament before the summer recess in mid-July, reduce the country’s 2020 offshore wind target from 10GW to 6.5GW and the 2030 goal from 25GW to 15GW.

Importantly, it also extends the so-called “compression model” for the offshore FIT for a further two years until the end of 2019. This rule allows operators to receive a higher initial FIT of €0.194 ($0.268) per kWh (€0.184 from 2018) during the first eight years of a project’s operation, in order to meet elevated initial investment costs. After those eight years, the FIT drops to €0.039/kWh for the next 12 years. Developers and investors had argued that without the compression model, no future offshore projects would be affordable.

Another positive for the industry is that the EEG reform will allow grid-connection guarantees — a vital requirement before any FID can be taken — for up to 7.7GW of offshore projects.

This will help ensure that the 6.5GW target is actually reached (in case one or two projects are delayed), and also shows that construction will continue without interruptions after 2020. 

Grid link delays, to a large extent, seem to be an issue of the past. TenneT’s financial bottlenecks have largely been resolved, and suppliers such as Siemens and Nordic Yards are no longer underestimating build-out times. The 30-month construction period promised for the initial offshore grid links has now been extended to a more realistic 50 or even 60 months, meaning that they are much more likely to be completed on time.

The links are also now standardised at 900MW each, which will help increase industrialisation of the process and bring down costs.

Although Germany is not going to speed ahead with offshore wind as fast as had been hoped, many believe that the new targets are far more achievable — few thought that 10GW could realistically be installed by 2020.

With level-headed targets in place, along with clearly defined, stable support regimes, many project FIDs are expected to be made in the coming months.

Marcus Wassenberg, chief financial officer at Germany’s third-biggest turbine maker, Senvion (formerly REpower), says that the company is “very satisfied” with the government’s reform.

“The market is picking up the change to the EEG,” he tells Recharge. “We’re talking about contracts in offshore wind again, and with several clients.

“We have transparency. It has become manifest that the future lies in renewable energies, and offshore wind is part of that future.”

RWE has told Recharge that it expects to take an FID on its Nordsee 1 project this year, once its re-tendering process is out of the way.

Germany’s biggest utility, E.ON, says it is ready to close finance on the 400MW Arkona Becken Südost project in the Baltic Sea as soon as the EEG reform becomes law.

Holger Matthiesen, manager for Arkona at E.ON Climate and Renewables Central Europe, told a recent offshore wind conference in Hamburg: “We hope for stable framework conditions so that we can reach an FID [on Arkona Becken Südost] at the end of 2014 or in early 2015.”

Companies such as EnBW could also soon reconsider past investment freezes. In late 2012, the utility put an FID for its 500MW Hohe See project on hold due to the regulatory uncertainty.

But not everyone is as optimistic as Wassenberg.

Ronny Meyer, managing director at Windenergie-Agentur (WAB), one of Germany’s most prominent offshore lobbying groups, says the downsizing of the country’s offshore targets has taken “imagination” out of the sector, adding that new FIDs will take time to trickle through the supply chain.

“It will be 2015 until investments that restart now will reach the factory floor,” Meyer says.

Jörg Kuhbier, chairman of lobby group Offshore Wind Energy Foundation, points to irreparable damage already done due by the grid connection delays and political uncertainty.

Meanwhile, IHS wind analyst Magnus Dale says he does not expect a wave of offshore wind FIDs as a result of the EEG reform, as the changes were largely anticipated by the market.

“We believe the cost-competitiveness of offshore wind as a technology and the integration of offshore wind power into the grid will be crucial for investments in offshore wind in Germany to accelerate.”

Kuhbier points out that Siemens’ recent decision to spend €190m on offshore wind facilities in England, rather than Germany, was a clear sign that it believes the UK is a better long-term prospect than its home market. For the past ten years, Berlin has failed to see the potential of offshore wind as a technology for the future, he adds.

Even reaching the new 6.5GW target by 2020 is by no means guaranteed. Only 616MW is operational in Germany’s North and Baltic Seas, with 2.3GW under construction and a further 872MW with FIDs already taken.

This totals 3.8GW — just over half of the goal. But Kuhbier points out that a further 6GW already have building permits.

So, while the German offshore wind sector is not where it would like to be, it does now seem to be back on the right track.

As Wassenberg says: “We have had an order lull... but we see that the market is picking up. We will increase production at the factories again.”