The Dutch government is working hard to prepare for the first offshore wind tender that will open in December 2015 with respect to sites I and II of the Borssele wind farm zone which is located near the southern border of the Dutch exclusive economic zone. This wind farm zone covers a total area of approximately 344 square kilometers that is designated for the development of two wind parks with a total capacity of 700 MW.
Since our previous News Flash on offshore wind a lot of progress has been made. This News Flash provides a status update on the development of the regulatory framework for the upcoming offshore wind tender and in particular focusses on the recently published draft Tender Regulation 2015 (Regeling windenergie op zee 2015) that provides detailed conditions on the subsidy that will be awarded during the first tender.
Status regulatory framework offshore wind
On 26 March 2015, the House Representatives passed the Offshore Wind Energy Act (Wet windenergie op zee) that is expected to enter into force by July 2015. This is an important step towards completing the regulatory framework for offshore wind parks and thus reaching the objectives as set out in the Energy Agreement: increasing the total offshore wind capacity from 1000 MW to 4.500 MW in 2023.
The Offshore Wind Energy Act contains the key requirements of the site decisions and the wind permits, linking the wind permit application process to the subsidy application. In addition, the Act also addresses the necessary preparatory works in relation to the development of an offshore grid that need to be initiated in order to meet the government's ambitious time schedule. The permit requirements are further elaborated on in a subordinate regulation, the Implementation Regulation Offshore Wind, which was published for public consultation on 2 April 2015.
The Offshore Wind Energy Act and its subordinate regulation however constitute only part of the regulatory framework for offshore wind energy. For a comprehensive understanding, this Act must be seen as part of the overall regulatory package that is currently being developed. Other important elements of this package include the Act for the Generation, Transport, Trade and Supply of Electricity and Gas (referred to as the STROOM Act) which regards, inter alia, the development of an offshore grid by Dutch TSO TenneT, and the SDE+ subsidy scheme for renewable energy.
The STROOM Act will formally appoint TenneT as the TSO for the offshore grid and will be the basis for claims of compensation in case of a connection delay or a transmission interruption. So far, only a draft version of this Act has been published, which was used for consultation of the market in July 2014. Following amendment as a result of the consultation and the advice of the Council of State, the STROOM Act is expected to be submitted to the House Representatives any day now and will then become public. We will therefore in this News Flash not elaborate on the STROOM Act, but dedicate our next News Flash on offshore wind to the new version that will soon be published. The STROOM Act is scheduled to enter into force on 1 January 2016.
The subsidy scheme for the upcoming tender consists of three elements: (i) the
Decision Renewable Energy Production Incentive Scheme (hereafter: SDE+ Decree), being the general regulation concerning the subsidy that stimulates the development of renewables, including offshore wind, (ii) the Implementing Regulation Renewable Energy Production Incentive Scheme (hereafter: SDE+ Implementing Regulation), being a secondary regulation based on the SDE+ Decree that further specifies the open standards of the SDE+ Decree and elaborates on the subsidy application requirements for renewable energy and (iii) the Tender Regulation 2015 (hereafter: Tender Regulation 2015), another secondary regulation that specifically regards the first offshore wind energy subsidy tender with respect to the Borssele sites I and II.
Both the SDE+ Decree and the SDE+ Implementing Regulation have recently been amended in view of the upcoming offshore wind tenders. A subsequent amendment of the SDE+ Implementing Regulation may be required to bring this regulation in line with the final version of the Tender Regulation 2015.
Below we will focus in more detail on key aspects of the draft Tender Regulation 2015.
Tender Regulation 2015
On 2 April 2015 the draft Tender Regulation 2015 was published for public consultation. The internet consultation that was organized by the Ministry of Economic Affairs closed on 30 April 2015. The government aims to publish the final wording of the Tender Regulation 2015 in June and the Regulation is scheduled to enter into effect on 1 December 2015, just prior to the start of the first tender which is expected to be opened the next day and will run until 31 March 2016.
According to its explanatory memorandum the Tender Regulation 2015 cannot enter into effect on an earlier date since that would mean that the site decisions have not yet been taken, whereas it should also not enter into effect on a later date since any further delay in the development of offshore wind would not be desirable. The Tender Regulation 2015 nevertheless anticipates a possible delay: if it only enters into effect after 3 March 2016, the tender will close later, on the 5th Thursday after the date on which the Tender Regulation 2015 enters into effect. This inherent flexibility seems contrary to the fixed date of entry into force and we therefore expect this to be amended in the final version of the Tender Regulation 2015.
The tender postponement ensures that the minimum duration of the submission period will always be 4 weeks. This seems a relatively short period, however as longs as the content of the legislative framework is known in advance, this should not be problematic. This may be different where essential changes are introduced shortly before the opening of the tender, in which case applicants may not have sufficient time to incorporate such changes into their financial model in the most efficient manner.
Requirements subsidy application
Pursuant to the Tender Regulation 2015 subsidy applications must regard the development of wind parks with a maximum capacity of 380 MW per site and a minimum capacity of 351 MW, reduced by the capacity of the turbine with the lowest capacity. These capacity requirements are deemed to provide flexibility, while at the same time ensuring that the sites will be used in an efficient manner. It should be noted, however, that TenneT shall only guarantee electricity supply up to 350 MW. In addition, the Tender Regulation 2015 sets out the maximum tender amount (i.e. the required subsidy per kWh). At present this amount has not yet been included in the draft Tender Regulation 2015. We understand however that a maximum tender amount of EUR 123/MWh is being considered.
Applications that do not meet these requirements will be disregarded. In addition, applications should satisfy the below criteria.
First of all the development and operation of the wind park should be financially feasible. To determine whether this requirement is fulfilled, the applicant's equity capital is required to equal at least 5% of the total investment of the wind park.
This percentage is generally believed to be low. It aims to apply a relatively low threshold for parties to participate in the tender process. However, since it is doubtful whether this threshold meets the original objective of ensuring the financial feasibility, this percentage may be reconsidered as a result of the internet consultation process.
For the fulfilment of this equity capital requirement the applicant may rely on its parent company (or in case of a joint venture, on the equity of one or more of its joint venture partners, pro rata to their interest in the applicant). This means that in case of a 100% subsidiary, the entire equity capital of the parent company may be accounted for to meet the 5% requirement, whereas in case of a 5% shareholder, only 5% of this shareholder's equity will count.
The 5% equity requirement only applies in relation to the period prior to the permit and subsidy award. Upon the permit/subsidy award the comfort that is provided by the equity requirement will be replaced by the bank guarantees that will need to be provided under an implementation agreement between the subsidy-receiver and the Minister of Economic Affairs (see below).
A second requirement is the economic feasibility. In order to determine whether the applicant meets this requirement it has to submit an income statement specifying the envisaged investment costs, project costs and benefits and the projected return during the subsidy period. In addition, the application must contain a wind energy generation calculation by a reputable independent organization, including the technical specifications of the wind park and the P50-value for the annual electricity production. Pursuant to the SDE+ Decree and the Tender Regulation 2015, the full load hours on the basis of the net P50-value constitute the maximum number of full load hours that are used to determine the annual number of kWh that is eligible for subsidy.
Although the Tender Regulation 2015 elaborates on the manner of establishment of the P50-value, this still seems to leave considerable room for discussion. In our view it would therefore be advisable to further clarify the manner in which the P50-value should be determined.
Start of construction
The application should furthermore include a time schedule, setting out a number of milestones (including the start dates of construction, production and the subsidy period) which should demonstrate that it is possible for construction to start within 4 years after the date on which the permit becomes irrevocable.
Achievability and technical feasibility
In addition, the applicant’s project plan should be 'achievable' and 'technically feasible'. Since it is felt that the bank guarantees that are due under the implementation agreement provide sufficient comfort in order to ensure that the subsidy receiver meets these conditions, these conditions have not been elaborated on.
Compliance with site decision
Last but not least, the application must comply with the site decision. So far the site decisions are important missing pieces. At present the environmental impact assessment is being executed. We understand that an informal consultation on the design of wind farm site decision II will take place in the second half of this month and that the draft design of the site decision and the final environmental impact assessment for sites I and II are scheduled to be made available for public inspection in Augustus 2015. The final site decisions shall only be published in November 2015.
Ranking the applications
Eligible applications that meet the above requirements shall be ranked on the basis of the tender amounts, whereby subsidy shall be awarded to the application with the lowest tender amount. This means that per site subsidy shall be awarded to only 1 project. The Tender Regulation 2015 however allows parties to submit 3 separate subsidy applications: for site I, for site II and a bundled application for sites I and II jointly. The latter is expected to result in synergy advantages that may be reflected in the tender amount.
A bundled application is deemed to constitute 1 bid and will therefore either be rejected or awarded as a whole. The rationale being, that it would otherwise not be possible to realize the envisaged synergy benefits. Although considered as 1 bid, a bundled application should specify the tender amount per site and will only be successful if both tender amounts constitute the lowest amounts for each of the sites. This seems a rather artificial split of the overall tender amount of a bundled bid and may prevent parties to submit the best possible bids for the two sites. In our opinion it therefore seems advisable to consider amendment of the Tender Regulation 2015 in this respect.
Implementation agreement and bank guarantees
The subsidy award shall be subject to two conditions precedent: (i) entering into an implementation agreement with the Ministry of Economic Affairs within 2 weeks of the date of the award, in the form as attached to the Tender Regulation 2015 and (ii) providing a bank guarantee for an amount of EUR 5,000,000 within 4 weeks from the date of the subsidy award, in the form as attached to the implementation agreement. This aims to ensure that the wind park shall actually be developed and start operation within 5 years from the date of the subsidy award.
A second bank guarantee – in the same form as the first one but for an amount of EUR 25,000,000 - shall be due within 12 months after the date of the subsidy award. If the subsidy receiver fails to provide this bank guarantee in time, a penalty will be incurred in the amount of EUR 5,000,000. In addition, the subsidy receiver will incur a penalty in the amount of EUR 2,500,000 in case of a delay in the start of operation of the wind park, increased with EUR 2,500,000 for each month that the delay continues.
As indicated above these bank guarantees replace the equity capital requirement as proof of the financial feasibility of the wind project. We feel however that – like the equity capital requirement - this objective will not be realized by the bank guarantees; the amount of the first bank guarantee will be too low to provide sufficient comfort in terms of the financial feasibility.
These bank guarantees are in addition to security that may have to be provided for decommissioning under the site decisions. Details on such security have not yet been published.
Former offshore wind permits
With the new legislation under way it became apparent that the Minister of Economic Affairs wanted to have a new, improved and accelerated system for the realization of offshore wind parks and took the position that the wind permits that had been awarded in 2009, but had not (yet) been granted subsidy, did not fit into this system. It was decided that these permits would be revoked upon the entering into effect of the Offshore Wind Energy Act. In addition, these permits were also excluded from obtaining subsidy in 2014 under the regular SDE+ scheme. As a consequence of this exclusion, which basically changed the rules during the game and made these permits valueless, the government announced to compensate the permit holders, provided that they had initiated preparatory work to apply for subsidy.
The regulatory framework is beginning to take shape but is by no means completed. With the first tender already opening in December 2015, the Dutch government is under considerable time pressure. It will not be an easy task to make all the pieces of the offshore wind regulation jigsaw fall into place at the right time.
At this moment, the site decisions are important missing pieces. In addition, we are eager to see the results of the internet consultation on the Tender Regulation 2015, the new version of the STROOM Act as well as the Offshore Code that is currently being developed by Netbeheer Nederland, the representative organization of the Dutch grid managers.
Apart from the fact that the government's time schedule for completion of the regulatory package is very tight and does not allow for the occurrence of any unforeseen circumstances, an important concern is that the tender process includes a number of uncertainties that may impact on the bids after their submission and are therefore not within the control of the applicants. At the time of the tender, the site decisions have not yet become irrevocable. As a consequence, there is a chance that, following appeal proceedings, the site decisions will be amended after the tender closure and consequently, the subsidy receiver will not be able to adjust its bid to take such changes into account. Moreover, although in such case the construction period may be extended with the period between the award of the subsidy/permit and the date on which the site decision becomes irrevocable, the start of the subsidy period will not be postponed. As a result, the time schedule for the development of the wind farm and the start of the subsidy period may become out of sync. Similarly, also the permit and subsidy decisions themselves will be open to (lengthy) objection and appeal proceedings, which results in a lack of certainty as regards both the contents of the permit and subsidy decisions and the time schedule for development of the park. Dealing with these issues and removing these uncertainties would in our view contribute considerably to the success of the tender.
To be continued.
The above is intended to provide an overview of important recent developments in relation to the envisaged tender process for offshore wind energy in the Netherlands. It is not intended to be a complete enumeration of all relevant legislation. If you have any questions or remarks regarding this newsflash please do not hesitate to contact us.