19 May 2017 | Benjamin Wehrmann

High hopes and concerns over onshore wind power auctions

Germany switches its support model for onshore wind power installations from guaranteed remuneration rates to tenders. After solar power and offshore wind power, setting the price by auctions is now also extended to Germany’s most important form of renewable energy generation. Some hail tenders as a much-needed step towards to reduce costs, others say they will push citizens' projects out of the market. The first auction results seem to confirm the former and negate the latter. CLEW takes a look at the auction procedure [Updates first auction results].

Key facts

  • Auction dates:  1 May, August & November (2017)
  • Volumes: 800 MW in first round, 1,000 in second & third round
  • (Tender limit in grid expansion area ca. 260 MW)
  • Maximum support rate per bid: 7 cents/kWh
  • Expansion corridor”:  2,800 MW (2018-’19), 2,900 MW (2020)

The Auction procedure

After having identified an appropriate and available windmill location, bidders have to obtain governmental authorisation for construction under the Immission Protection Law (BImschG) and register their project with Germany’s Federal Network Agency (BNetzA) database three weeks before filing the application [See the agency's website for a detailed description in German]. Getting the BImschG authorisation may take about one year and requires initial investments contingent on the complexity of legal requirements and natural conditions of the location. This has been a prerequisite for any wind power installation already before the switch to auctions and is deemed necessary to ensure that bidders are committed to their projects.

The BNetzA demands a registration fee as well as a security of 30 euros per kilowatt of installed capacity for each project. This too is meant to ensure bidder commitment. Submitted projects are then evaluated primarily on the basis of their proposed support rate – the lowest bidder is awarded with a contract. In cases of parity, the lower tendered capacity takes precedence.

Citizens' energy cooperatives turned out as the "big winners" of the first round of auctions, according to state secretary Rainer Baake. Citizens' projects managed to secure 93 percent of all successful bids this time, with the average remuneration rate standing at 5.71 cents per kilowatt hour (kWh). But according to the World Wind Energy Association, it remains to be seen how many citizens' projects will actually be implemented.

After the contract award

Winning bidders are required to implement their projects within 30 months after contracts are awarded to keep their auctioned support rates. A special provision for citizens' projects extends this period to a total of 54 months. After this period, the arrangement becomes void and the security payment is retained by the agency. Late fees for larger bidders apply after two years, the BNetzA specifies. Operators of the finished wind parks are obliged to feed the generated power into the grid rather than consuming it themselves for the entire support period of 20 years.

Small turbines with a capacity of up to 750 KW, pilot projects built primarily for technology research and development purposes and also projects that received permission until the end of 2016 and implemented before the end of 2018 are exempt from auctions. Remuneration for turbines completed in this transition period, however, gradually decreases depending on the total expansion volume by up to 2.4 percent per quarter. The Federal Grid Agency's application form for onshore wind power tenders

Why change the system?

Former economy minister Sigmar Gabriel has described the switch to auctions as “the Energiewende’s next stage”. Auctions are intended to keep renewables expansion stable and predictable by fixing supported volumes. The system should also boost competition among investors in order bring down costs.

Recent expansion of more than 4,400 MW on average per year exceeded the government’s planned “target corridor” of 2,500 MW, as it had been fixed in the Renewable Energy Act’s (EEG) reform in 2014.

New remuneration Model

The switch to auctions does not change the principle to support renewables expansion financially as such and retains many elements of earlier EEG stages. Operators continue to have the right to have their installations connected to the grid by the grid’s operator. They need to be able to transmit and distribute their electricity. Grid operators have to provide appropriate grid capacities or otherwise pay compensation if turbines are throttled down.

Just like under the old support system, operators sell their product directly on the market. They continue to receive a premium covering the difference between wholesale power prices and guaranteed remuneration. The major difference is that under the old system, this “market premium” was set by the state. Now it is determined by the operator’s offer in what the BNetzA calls a “pay as bid” principle.

Bidder profile

The government's special provisions for “locally rooted” citizen energy cooperatives are meant to retain the “diversity of actors” in German wind power projects.  These have to consist of at least ten citizens, the majority of whom living in the region where a wind park is built. Citizens' projects are capped at a capacity of 18 MW.

The cooperatives’ bids are facilitated by easing the BImschG’s requirements, lower security payments and the extended implementation period. Additionally, citizens' projects do not necessarily get the support rate they calculated with but instead that of the highest wining tender, granting them preferential financial treatment compared to larger bidders, the BMWi argues. In the first round of auctions, the highest accepted remuneration was 5.78 ct/kWh.

Critics of the reform say that auctions will have adverse effects on actor diversity regardless of the special conditions for small bidders and may ultimately even lead to a fall in onshore wind capacity as older plants retire. The German Wind Energy Association (BWE) calls tender-based support “the wrong instrument” as small bidders lack the capabilities to bid in the formally complicated tenders. Small investors still run the risk of seeing all their investments stranded if they are not awarded with a contract, it says. “In case of several unsuccessful bids, small actors might be forced to drop out of the market.” It urged authorities to "positively assist" successfull citizens' cooperatives in implementing their projects after the first round.

Larger bidders say the auction model could become a success, provided that the average project is allowed to grow in scale. Danish turbine producer heavyweight Vestas told news agency Reuters it did not consider the Danish government’s plans to phase out subsidies altogether by 2030 to be a problem if larger onshore developments can be implemented. In the same vein, Swedish utility Vattenfall said it aimed to implement subsidy-free onshore projects in the near future.

Past auction experiences

Germany’s switch to auctions for renewables support started with solar power installations. The BMWi called the first experiences made with the new system a success, saying that “competition (…) was high and prices fell from round to round, which was good news for consumers.” It emphasised that also small bidders managed to win tenders - a view that was substantiated by the latest results.

Similarly, the first round of offshore wind power auctions was deemed a success. Much to the surprise of many observers, Danish energy company Dong and German utility EnBW made successful bids with demanding zero support. However, implementation of these projects will not take place before 2024.

The BWE warned that auction experiences in other countries often resulted in a high rate of projects that ultimately had not been implemented. It also criticises that onshore wind power expansion volumes eligible for support make no difference between turbines for repowering and do not account for decommissioned windmills, making the tendered 2,800 MW a mere gross value.

According to calculations by energy consultancy enervis, the share of repowering in total tender volumes is set to steadily increase over the next years. In its scenario for 2023, “the entire planned expansion volume will be used for replacing phased-out installations,” which could result in a net-decrease of wind power capacity, enervis explains.

Matthias Zelinger, head of the German Engineering Federation (VDMA) says it was difficult to predict how total capacity will be affected in the medium-run. “The wind power industry is ready to face the competitive challenges posed by auctions,” Zelinger said. However, he called on the government to reconsider the tendered volumes and expand its targets if necessary.

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