EEG reform 2016 – switching to auctions for renewables

The “deployment corridor” and auctions for renewables

The reform of the Renewable Energy Act (dubbed EEG 2017), is slated to take effect on 1 January 2017, after it passed parliament in early July. For an overview of first reactions by industry, politicians and NGOs to the law proposal, see here.

The EEG, with its feed-in tariffs and priority access for renewables, is credited with enabling Germany’s renewables growth. The share of renewable electricity generation increased from 3.6 percent in 1990, when the law was enacted, to 30 percent in 2015. The reform means that feed-in tariffs will now be discarded of in favour of an auction system for most renewable technologies. To keep a steady hand on the rise in renewable power over the next decade and achieve the renewables target in 2050, the government will largely stick to the 2014 “deployment corridor” (§3 EEG). The tenders will provide the mechanism for adhering to this corridor by auctioning a specific amount of capacity volume each year. These are some of the key elements and changes in the EEG 3.0:

• As set in the 2014 EEG before, the share of renewables shall rise to 40-45 percent by 2025, to 55-60 percent by 2035 and to a minimum of 80 percent by 2050.
• A “deployment corridor” is established, specifying how much renewables capacity may be built per year.
• Payments to renewables installations shall be determined in a competitive process (auctions), instead of being fixed by the government (feed-in tariffs).
• With the new law, only those renewables installations that have won a tender will receive payments for the power they supply
• Every renewable technology (photovoltaics, onshore wind, offshore wind, biomass) will get a tailored auction design.
• Small renewables installations of under 750 kilowatt (kW) capacity (in the case of biomass under 150 kW) will not be part of the tender system; they will continue to receive feed-in tariffs (with small changes) under the current system of EEG 2014. The ministry believes this rule, in combination with a “simple and transparent” auction system for onshore wind, will ensure that citizen cooperatives and small project developers remain active in operating small renewables plants. However, there will be no exemption for wind farms with under six turbines, since this would reduce competition and be economically inefficient, the ministry reasons.
• Under certain conditions, installations from other European countries can participate in the auctions for 5 percent of the annually installable capacity.

Why the reform?

• The deployment corridor, in combination with the tender system, makes it easier to control renewables development and adjust it to the grid expansion, the ministry states.
• It improves planning security for actors in the power industry and for Germany’s neighbours.
• It is in agreement with the European Commission’s goal of having market-based renewables support.
• The ministry believes that costs for renewable power can be limited to the economically necessary level for each installation by switching to the tender system.

The auction design and capacity volumes

An auction system was piloted in 2015 for ground-mounted solar installations. The ministry based the new auction design on the lessons learned from the 3 rounds of tenders, which, for example, led it to discard the “uniform pricing” system in favour of the “pay-as-bid” system.

These are some key points of the new auction design and the capacity volumes that shall be auctioned for the different renewables each year, to ensure that their growth follows the overall deployment corridor:

• The Federal Network Agency (Bundesnetzagentur) will call for tenders for renewable installations; their volume will correspond to the development needed for a 40-45 percent renewables share in 2025.
• Starting in 2017, there will be three to four rounds of auctions per year (for solar PV and onshore wind). Participants place single, sealed bids. Bidders have to lodge a security deposit to ensure that only serious bids are submitted. Bids are tied to projects and can generally not be transferred to other projects (onshore wind), or their funding will be reduced if they are moved (solar PV).
• The auctions will follow the pay-as-bid principle, i.e. the amount of funding corresponds to the individual bid placed.
• The lowest bids will be accepted until the volume of capacity auctioned is reached. A maximum price will be published in advance.
• Successful installations will receive the funding rate with which they won the bid for 20 years.

• Special rules for citizen energy projects: They also have to participate in the auction system (unless they are too small, see below) but enjoy certain benefits, e.g. they will automatically receive the highest feed-in tariff accepted in the tender., rather than their own (possibly) lower bid.

Solar PV

Photovoltaics installations are the only renewable energy source for which an auction scheme has been tested. The new EEG will follow a very similar system to the 2015 pilot tenders. Installations that can be entered into the auctions are ground-mounted or rooftop installations, larger than 750 KW. PV systems shall be mainly installed near roads and railways, while their installation on arable land and conservation areas is limited. There will be three auctions per year.

The deployment corridor for photovoltaics installations plans an additional capacity of around 2.5 gigawatt (GW) per year. The annual capacity volume to be auctioned is 600 MW – the remaining PV additions will come from smaller installations that are not participating in auctions. Feed-in tariffs for these installations will be capped once a total capacity of 52 GW is reached (at the end of 2015 solar PV capacity in Germany was 40 GW).

Onshore wind energy

Onshore wind tenders will have another prerequisite: bidders will have to get their projects approved under the Federal Immission Control Act (late-stage auctions). In return, onshore project developers will have to lodge a smaller security deposit. Installations shall be completed within two years.

However, rules for citizen cooperatives participating in wind energy tenders will be different. Existing, small, local cooperatives with a minimum number of individuals participating will be exempt from providing the costly permission under the Immission Control Act before making a bid and will get other financial privileges.

Auctions will be held more frequently in the beginning (3 in 2017 and 4 in 2018) to establish a price level as soon as possible. According to the government’s justification of the law, the new rules are designed to encourage efficient installations in places with strong wind. They also provide incentives for new installations to be built across Germany, i.e. not only in windy places along the coasts. To achieve this, a set of complex calculations (Referenzertragsmodell) to ensure comparability of bids and fair payment to the successful projects will be put in place.

The annual capacity volume for onshore wind installations will be set at 2.8 gigawatts (GW) per year in 2017-2019 and at 2.9 GW after 2020, taking into account the 45 percent renewables target for 2025. This is to ensure that particularly onshore wind, which has expanded greatly in recent years, stays within the deployment corridor, the government says. In order to better synchronise the grid expansion with renewables growth, the expansion of onshore wind will be limited in certain so called "grid congestion zones" where high input of renewable power could not be transported because of bottlenecks. These areas will be determined by the Federal Network Agency (Bundesnetzagentur). In these regions, the building of new wind turbines will be limited to 58 percent of the average additions between 2013 and 2015.

Offshore wind energy

The new law on funding offshore wind energy will apply to those installations that start to operate in 2021 or later. The longer transition period is in the interest of coherence and predictability for the offshore wind energy sector. As of 2025, the government will explore sites for future wind farms itself – bidders will then compete for the right to build a wind farm at a specific location. The ministry proposes this centralised (Danish) model to ensure sufficient competition and to make site planning, installation approvals and grid connections more cost effective and dovetailed.

Between 2021 and 2024 a transitional auction model will apply: Wind farms that have already been planned and approved will compete in two rounds of auctions for a limited amount of capacity. The energy ministry published a more detailed timeframe and auction design proposal (in German) in February 2016.

Offshore wind expansion will remain at 15 GW by 2030. The capacity volumes auctioned per year will be in line with this target and will be around 500 MW per year between 2021 and 2022; 700 MW between 2023 and 2025 and 840 MW annually from 2026 onwards. In 2021, only wind parks in the Baltic Sea will be permitted, due to a lack of grid connections in the North Sea.

Biomass and others

After a meeting in June 2016, the government decided that biomass plants will take part in the new auction system for renewables. Biomass capacity should be expanded by 150 megawatts (MW) annually in the next three years and by 200 MW in the following three years. All installations with a greater capacity than 150 kW can participate in the tenders, also those that have receiving feed-in tariffs under former EEGs. Biomass plants only receive remuneration for half of their runtime. This is to incentivise their operation during times of high power prices, i.e. times of low input from wind and solar, the ministry reasons.

Hydropower, geothermal and mine-/landfill-/sewage-gas are excluded from auctions. The Ministry for Economic Affairs and Energy has found there wasn’t enough competition in these technologies to make auctions meaningful.