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Sept. 22 — Since the energy transition was implemented in 2011, Germany has made offshore wind the cornerstone in its program to switch its energy use from fossil fuels to renewables—but for years, the sector missed government-set targets, plagued by technical and financing problems and a lack of infrastructure development.
These days, however, the sector is registering strong growth in capacity: Germany connected a record number of new offshore wind turbines in 2015 to take the lead as the European Union's fastest-growing offshore wind energy market.
Even so, analysts warn the increase is only short-term and a distraction from the need to develop safeguards to secure the industry's long-term growth and financial viability ahead of Germany's forthcoming switch to a tendering system for renewables, when funding for wind and solar will be determined by auctions in an effort to expose the sector to market forces.
“We currently have a very fast-growing offshore wind capacity, especially in the North Sea, which is why we have a very good situation at the moment,” Matthias Zelinger, chief executive officer and energy policy spokesman for the German Mechanical and Plant Engineering Association (VDMA), told Bloomberg BNA.
“But we will not see these figures continuously over the next few years as we move to a tendering system,” he added. “Under the existing conditions of the planned bidding system, where there are more projects in the pipeline than there are tenders, the challenge will be for companies to survive.”
Renewables make up slightly more than a quarter of Germany's electricity needs and the country aims to increase that amount to 35 percent by 2020 and 80 percent by 2050—much of it from offshore wind farms—as it phases out the last of its 17 nuclear power plants.
Onshore wind contributed 8.4 percent to the mix in 2014, with biomass contributing 8 percent, solar 5.8 percent, hydropower 3.4 percent and offshore wind 0.2 percent.
That is still a long way from German goals that call for offshore wind to contribute a far larger share of the electricity mix. Offshore wind capacity targets are projected to total 6.5 gigawatts by 2020, just two years before the nuclear reactor shutdown. By 2030, offshore wind capacity is projected to reach 15 gigawatts.
At the end of 2012, the nation's offshore capacity was at 08.3 megawatts, according to the German Offshore Wind Energy Foundation. It was 508.3 megawatts by the end of 2013 and 1.05 gigawatt by the end of 2014.
Analysts say the sector would have grown even faster since 2012 if not for the infrastructure and investment needed lagging behind schedule. That was in part due to the grid being unable to absorb all the electricity being produced.
A big problem also was investors staying away because of financial uncertainties and the lack of a liability structure for investment; the North Sea is a harsh environment for wind park operators due to strong winds and storms and saltwater corrosion. That adds high operating and maintenance costs and risk to already expensive construction and connection costs for projects miles from shore in deep waters.
Also, transmission operators struggled with financing and technical issues operating in that environment, analysts say.
But the situation has turned around. According to the German Offshore Wind Energy Foundation, the nation connected 422 new offshore wind turbines at a combined capacity of 1.77 gigawatts in the first six months of 2015—far ahead of the EU's largest offshore wind market, the U.K., which, according to the European Wind Energy Association, connected only 140 turbines with a combined capacity of 522 megawatts during the same period.
And capacity growth in Germany is set to continue this year.
According to figures from the Offshore Wind Energy Foundation, at least 90 additional turbines will connect to the German grid this year, prompting projections that will generate 2.25 gigawatts of new offshore wind power in 2015 throughout the entire nation.
“Things are developing very well at the moment,” Sebastian Sahm, spokesman for the Offshore Wind Energy Foundation, told Bloomberg BNA. “Germany now has 670 sites altogether with a capacity of almost 3 gigawatts, which can supply 3 million households.”
“Of course the U.K. will continue to be very far ahead overall for some time, but a lot of projects are being developed in Germany, which is a sign things are progressing well here,” Sahm added.
Even so, analysts say the upswing should be regarded with caution.
“It's not a sign of a boom right now, because the new plan focuses mainly on onshore wind and solar,” Sven Teske, senior renewable energy expert at Greenpeace, told Bloomberg BNA, referring to measures under the Renewable Energy Act 2014 (EEG 2014), which entered into force on Aug. 1, 2014. “Many of the offshore wind projects completed this year had been delayed by several years. It was by chance so many happened in the same time frame.”
VDMA's Zelinger also pointed to EEG 2014 to explain the capacity increase.
By setting new and lower targets for offshore—6.5 gigawatt-capacity by 2020 and 15 gigawatts by 2030—EEG 2014 delivered offshore wind financiers greater certainty in their investments, and therefore freed up funds for projects that were ready to go but had been put on ice due to lacking funds, according to Zelinger.
“The increase is the result of a combination of regulatory and financial hurdles, which once created uncertainty for banks and other financial institutions, being lifted,” he told Bloomberg BNA. “So, thanks to the new renewable energy legislation, we are seeing this big volume coming into the grid. Because once the issue of uncertainty for investors was resolved, banks returned to the projects to ensure they received the funding to be realized.”
But analysts say the reassurances for continued investment under EEG 2014 do not remedy the longer term challenges of switching to an auction system for offshore wind.
Under the current system in Germany, renewable energy funding is granted as fixed feed-in tariff payments, which are fees paid to renewable energy operators at an above-market rate for electricity by consumers as an incentive to encourage deployment of renewable electricity technologies. EEG 2014, however, stipulates that funding for renewable energy sources is to be determined by auctions—such as onshore wind by 2017 and offshore wind by 202. According to the German Federal Ministry for Economic Affairs and Energy, this is intended to make funding for renewables more market-oriented and to meet the requirements of the EU Guidelines on State Aid for Environmental Protection and Energy 2014–2020.
Still, Zelinger said the government's current plan to introduce just one tender for offshore wind during a three-year transitional period between 2021 and 2024 leaves a “big question mark” over projects beyond 2020.
“This is a big risk for the offshore wind industry because if you have just one tender in three years, first you will have all the projects accepted at the same time, meaning you have just one technical generation,” he said. “And secondly, you will see who the winners are and who the losers are, and the losers will not have any prospect for projects over the next three years and this for companies is a big risk.”
Also unsettling project developers and their financiers are reports that offshore wind is projected to generate higher costs than solar in coming years. Cost burden of offshore wind will peak at 32 billion euros ($36 billion) annually by the mid-2020s, according to a study published in May by leading German think tank, Agora Energiewende.
As such, analysts says long-term regulation of the auction system, which should include cost-reduction measures, is vital to minimize risks to offshore wind developers and investors and ensure that offshore wind power in Germany remains viable in future.
“This is a market system, so of course project developers must take risks, but the important thing is minimizing that risk by having two or maybe three tenders, and regulating the tendering process and auctions in an intelligent way to ensure a proper transition to the new system,” Zelinger said. “And secondly, we must ensure that we deliver a significant cost reduction in offshore wind power because although it produces 4,500 kilowatt hours per year, which is significantly more than onshore wind, it's also clear that under current conditions, our energy system won't be able to fund a big portion of offshore wind because it would simply be too expensive. And financing is of course the backbone of the entire project.”
To contact the reporter on this story: Jabeen Bhatti in Berlin at email@example.com
To contact the editor responsible for this story: Greg Henderson at firstname.lastname@example.org
The Renewable Energy Act 2014 is available, in German, at http://goo.gl/6g7ASV.
The EU Guidelines on State Aid for Environmental Protection and Energy 2014–2020 are available at http://bit.ly/1vjuX1x.
The Agora Energiewende study is available, in German, at http://goo.gl/ZSry6t.
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