On 26 November 2018, the Minister of Economic Affairs and Climate presented the long-awaited legislative proposal for amending the Offshore Wind Energy Act (OWEA or Wet windenergie op zee) to the House of Representatives.
Through an adjustment and expansion of the tender system, the bill is a reaction to the decreasing need for subsidies and aims to provide a versatile tender mechanism for the future.
In the bill's explanatory notes, the government welcomes this decreasing need, which has resulted in the world’s first successful subsidy-free tender, but it also acknowledges that a full exposure to market prices may create uncertainty and lead to increased capital costs and a higher realisation risk. In short, subsidies may still be needed in certain situations.
This bill addresses such situations. In essence the OWEA remains unaltered with the Dutch government setting the parameters for the location of the wind parks, the grid connection and the pace of development. Wind parks may only be developed within designated areas where site decisions set out the conditions for park development and operation. Once the site decision is adopted, the wind permit is tendered. The OWEA currently offers two tender procedures: a subsidised one with a wind permit and SDE+ subsidy awarded to the party offering the lowest tender amount, and a subsidy-free procedure with a wind permit awarded on the basis of a comparative test. The bill now introduces two additional tender methods: a combination of a comparative test and a financial bid, and an auction procedure.
In the procedure combining the already existing comparative test with a financial bid, the ranking of the tenderers is determined on the basis of both elements. In the auction process, however, decisions will be made solely on the price. In the explanatory notes on this procedure, reference is made to a ‘negative subsidy’ (i.e. an amount payable to the government). Similar to other auctions, such as for telecom frequencies and service station concessions, the bid price will be a fixed amount unaffected by the achievements of the permit holder (e.g. the amount of electricity generated by the wind park). This rule aims to avoid strategic behavior. The procedure for submitting bids and the timeframe for bid-price payment (i.e. payment in one sum or in installments) will be set out in a ministerial regulation for each tender.
The system to be applied could differ per tender and will depend on market conditions (i.e. the costs for developing and operating a wind park on a given site and the anticipated electricity price). The decision of what system to use will be taken on a case-by-case basis and will be set out in a ministerial regulation. When deciding on a system, the first question will be whether subsidy is necessary. If the answer is yes, the subsidised tender procedure will be adopted. If the answer is no, one of the three subsidy-free methods will be chosen. If it is not clear whether subsidy will be required, a combination between the subsidised tender procedure and one of the subsidy-free methods will be used. In order to apply the most suitable tender procedure and avoid delays in the time schedule for the offshore wind tenders, the two tender procedures will be initiated simultaneously. In such case, tenderers will only be allowed to compete for one of these tender procedures. (If a tenderer takes the position that it requires subsidy for the development of a wind park, it is not allowed to participate in the subsidy-free tender for that site.)
To ensure that a wind park is realised, the winning party of any tender procedure will have to provide the Dutch state with a security deposit or bank guarantee. In the case of a comparative test with a financial bid or an auction, the bid price will not be reduced by the amount of the deposit or guarantee.
During the consultation round, the Netherlands Wind Energy Association suggested including the ‘contract for difference’ as a temporary tender procedure during the transition to an auction process. This proposal was not accepted. In the explanatory notes, the Minister of Economic Affairs and Climate explains that the contract of difference may resemble the Dutch SDE+ subsidy (i.e. the government pays the operator in case the electricity price is lower than the cost price), but an important difference is that in the contract for difference the operator pays the government if the electricity price is higher than the cost price.
According to the Minister, this means that during the term of the contract for difference wind parks will not be fully part of the electricity market, and he finds that such continued reliance on subsidy should be avoided. In addition, the contract for difference would require a significant amendment to the Dutch legal system. Under Dutch law, payment under the contract for difference by the operator to the government qualifies as a levy, which does not fall under the Framework Act Economic Affairs Subsidies that governs the SDE+ subsidy. As a consequence, the fact that the Netherlands – different from the UK – has a legal system separating subsidies and levies means that applying a contract for difference would require complex changes in the legal system.
Another important element of the bill is the option to extend the term of the wind permit's 30-year tenure (i.e. 4 years for park development, 25 years for operation and one year for decommissioning) by a maximum of ten years. Such an extension would not be granted for the term's first 20 years and a decision on such extension would take into account all relevant interests.
The proposal will now be debated in the House of Representatives. The next tender for the Hollandse Kust III & IV wind area will open for applications in January 2019. Since the bill will not be adopted by then, current legislation will apply. It is expected that the tender process will be identical to the Hollandse Kust I & II wind area tender in 2017.
More information on existing tender procedures can be found in the CMS Guide to Offshore Wind in Northern Europe.