Potential of the energy transition for investors in Germany: Noerr Insight, No. 1: Offshore wind

In our briefing, German energy transition: Potential for investors, we provided a comprehensive look at the opportunities and risks of the energy transition in Germany for domestic and foreign investors. We are now starting a series of articles to provide you with regular and in-depth information on the individual asset classes over the coming weeks. We start with Part 1 on offshore wind.

1. Current situation and challenges

For many years, the expansion of offshore wind power plants was stalled, whether due to the major technical difficulties of constructing and maintaining wind turbines exposed to tides and saltwater, or due to the challenges involved in connecting them to the power grid. The previous requirements for state subsidies were correspondingly stringent. This has now been reversed, as the technology for offshore wind is now more mature and project developers have already been able to gain sufficient experience for project planning and to build up expertise. The latest technical developments can be seen in other European countries, where the first projects with floating offshore turbines are now being planned. The advantage of this type of technology is that it enables local expansion of offshore wind farms into previously inaccessible areas, such as those where the sea is particularly deep or where anchoring the turbines to the seabed is difficult.

Now that this learning curve is complete, offshore wind is particularly attractive to investors due to the large amounts of power that can be generated with each wind turbine and the relatively minor restrictions due to other turbines, neighbours or other concerns. In view of the potential volume of power that can be generated by offshore wind, the expansion of offshore wind farms is also seen by the German government as a cornerstone of the success of the energy transition. In particular, the Planning Acceleration Package 1 (known as the Easter Package), which included amendments to the German Renewable Energy Act (Erneuerbare-Energien-Gesetz), the German Offshore Wind Energy Act (WindSeeG) and other laws and regulations in energy law, is accompanied by a large rise in the annual expansion targets and other measures, as well as a system change to the tendering process for offshore contracts, with the aim of revitalising the expansion and making it more attractive. In fact, after the first two tendering rounds, this appears to have been successful.

2. Special regulation of incentives

The provisions of the German Renewable Energy Act are accompanied by the amendment to the German Offshore Wind Energy Act, which came into force on 1 January 2023. The Act stipulates an increase in the installed capacity of offshore wind energy to 30 GW by 2030 (instead of the previous 20 GW) and to at least 70 GW by 2045. Tendering rounds for 8,000-9,000 MW are now planned for 2023/2024, 3,000-5,000 MW for 2025/2026 and 4,000 MW from 2027, which promises considerable investment potential. As of 1 January 2023, the German Offshore Wind Energy Act now also expressly states that the construction of wind turbines at sea and offshore connection lines are in the overriding public interest and serve the purpose of public security.

The Act governs the authorisation and tendering process as well as the operation of German offshore wind turbines and connection lines. The Federal Maritime and Hydrographic Agency (Bundesamt für Seeschifffahrt und Hydrographie) will produce an area development plan based on the German Offshore Wind Energy Act and after examining the subsoil, marine environment, etc., which will define technical planning specifications for regions, sites, the expected capacity to be installed, etc.

In addition to centrally pre-examined sites, i.e. those where the Federal Networks Agency (Bundesnetzagentur) is already carrying out preliminary investigations to define the situation of the site in question, etc., sites that have not been centrally pre-examined have now also been put out to tender for expansion projects with effect from 1 January 2023 in order to achieve the expansion targets. On these sites, the winning bidders are themselves responsible for investigations. The contract-award procedure differs depending on the area. In the case of centrally pre-examined areas, for example, the planning approval procedure will be omitted and replaced by a faster planning approval procedure to avoid duplication of investigations at the level of preliminary investigation and approval in the future. The scope of environmental impact assessments for centrally pre-examined areas will be reduced in the future.

In addition to the considerable expansion of wind farms, it is also necessary to have the required offshore grid connections available. The German Offshore Wind Energy Act therefore specifies the aim of synchronising the expansion of offshore wind turbines with the offshore connection lines on land in order to distribute the power generated offshore as effectively as possible on land.

3. Investor environment – Impact of regulation on investors

This incentive regulation has had the desired effect: Both for sites that were not centrally pre-examined as well as for sites that were pre-examined there has been significantly more demand from potential investors than there were sites put out to tender.

The first round of tenders for 7 GW for sites that were not centrally pre-examined took place in June 2023. At that time, i.e. about a year ago, there were several zero-cent bids for all the sites put out to tender. The bidders who ultimately won were even prepared to make additional payments on every kWh fed into the grid in order to be awarded the project development contract. And the bidding environment has also changed. While large consortia of venture capital investors and turbine manufacturers traditionally used to dominate the field, large oil companies were also awarded contracts last year and in the first tenders this year.

While such negative bids may seem pleasing for taxpayers at first glance, it is doubtful whether the medium-term aims of the energy transition can be achieved with them. Even with negative bids, investors will only be prepared to invest if a reasonable profit margin can be expected. In other words, all construction and production costs will inevitably be added to the subsequent energy price. Awarding contracts for such negative bids will therefore presumably keep energy prices high, if the projects are realised at all. The implications of such developments remain to be seen.

4. Outlook

At the end of 2023, there were 1,566 offshore wind turbines with a total capacity of 8.5 GW in operation in Germany.

The latest plan currently available from the Federal Maritime and Hydrographic Agency (Bundesamt für Seeschifffahrt und Hydrographie) is a draft of a site development plan dated 7 June 2024. This draft aims to increase the previously planned expansion target for 2035 (40 GW) by 10 GW. It is expected that certain sites designated for the expansion of offshore facilities (N-9, N-12, N-13, N-14, N-16 and N-17) will be made larger. The newly designated sites are intended to enable additional expansion with estimated total capacity of 28 GW. Together with the planned sites, the federal government expects to achieve estimated total capacity of approx. 70 GW by 2045.

On 22 February 2024, the Federal Maritime and Hydrographic Agency determined the suitability of sites N-9.1, N-9.2 and N-9.3 to be put out to tender by the Federal Networks Agency in accordance with Part 3 Section 5 of the German Offshore Wind Energy Act by means of a statutory order. This corresponds to a volume of at least 5.5 GW. On 28 February 2024, the Federal Networks Agency put these areas out to tender with a deadline of 1 August 2024. In addition, on 29 January 2024, the Federal Network Agency invited tenders for sites with a volume of 2.5 GW for areas that were not centrally pre-examined. Zero-cent bids were received for the latter, meaning that a dynamic bidding process was required for the second time. This shows that offshore expansion is already profitable even without subsidies.

Apart from these tenders, it should be noted that there was only a capacity increase of 0.4 GW in 2023 as a whole. The period between the contract award and commissioning of the plant is long. For example, the projects with a bid date of 1 June 2023 (volume of 2,000 MW) are scheduled to be commissioned by 2030.