Pilot tenders in accordance with the Ordinance for Competitive Bidding for Financial Support of Freestanding Installations (FFAV) - Update: Analysis of the latest experiences and findings

Review

“The Ordinance for Competitive Bidding for Financial Support of Freestanding Installations and for the Amendment of other Ordinances for the Promotion of Renewable Energies” largely entered into force on 12 February 2015 (see Dentons Newsletter from February 2015). The centerpiece of the ordinance is its Article 1, the Ordinance for Competitive Bidding for Financial Support of Freestanding Installations (FFAV). The amended Renewable Energies Act (EEG) from 2014 forms the legal basis. PV installations were selected for the pilot tenders because of their short planning and approval periods and given that there are already established professional providers operating on that market, it was possible to quickly launch the tenders.

First tender – general information and appraisal

The first tender for freestanding PV installations covering up to a tender volume of 150 megawatts was announced on 24 February 2015. PV installations located on or adjacent to buildings, noise barriers or other structural sites are not considered freestanding installations. The Federal Network Agency (BNetzA) accepted bids until 15 April.  Interesting analyses and comments were made at the federal government and administration level with respect to the outcomes of the first tender (of particular interest was the reply to a small motion tabled by members of the federal parliamentary group Bündins 90/The Green Party and a BNetzA background paper). However, associations and expert groups were also quick to offer their analyses. Below are some highlights taken from the range of comments and remarks made:

  • The main reason why legislators introduced the tender model was (at least) to maintain a wide variety of players on the market. Because in order to do justice to the tender model, whose overriding purpose is to find the best competitive financial support level for PV installations by using market-based instruments, is to guarantee sufficient competition. However, researchers from the Leuphana University in Lüneburg found out in a study commissioned by the federal government that smaller private investors, such as energy cooperatives and citizens’ projects can recurrently be disadvantaged by the tenders. The study puts it down to the high transaction costs (advance financing) and the process-related risks (insecurities, whether a tender will be awarded or not); which smaller companies are not able to respectively absorb or avert. As part of the bidding rounds, bidders must submit with the bid a first security deposit of 4 EUR per kilowatt tendered (§§7, 16 FFAV); which will be replaced by a second security deposit. The reason for these security deposits is to ensure that the awarded capacities are realized. Because lessons drawn from foreign markets showed that without such securities, the realization quota of awarded projects can easily drop below 50%. It is often impossible for small companies to provide securities of this nature and level. The federal government on the other hand believes that when it comes to PV installations, large project developers dominate the market structure anyway; thus in terms of technology less attention should be put on the diversity of market players.
  • Other critical voices on the other hand see the aspect of technology-related specificities as an occasion to raise doubt about the eligibility of pilot tenders to gather experiences in order to extend these tender models to other technologies which generate electricity from renewable energy sources (in particular wind energy and biomass). For one, the planning periods and costs for wind energy projects are far more extensive than for PV installations.
  • At first sight, the total number of 170 bids with a capacity of 715 megawatt (MW) submitted to the BNetzA in the first tender shows that there is already an impressive number of market participants active in this relevant market. The number exceeded all expectations.  It is important though to note that the first tender still accepted projects, which under the previous EEG funding scheme (8,48 ct/KWh latest figure) would have no longer met the economic viability threshold. Market participants are reported to have made extensive use of this; also because of the uncertainty of the outcome of the tender and given that the new regulatory framework has not yet been tried and tested. In other words, some bidders evidently believed that a project with little promise of being realized outside FFAV could still make a good “trial balloon” for the tender.
  • From the 170 bids submitted, more than a fifth (37 bids) were excluded because they did not fulfill the bidding requirements and showed formal errors. A formal error deemed to exist, for example, if bidders failed to provide evidence of the planning state of the project; or forgot to give information about the surface; or if they failed to submit a copy of the approval for a development plan; or if they did not provide the first security deposit; or if bidders exceeded the maximum bid value. While some of the errors surely could have been avoided and/ or been clarified by replying to bidders requests, other errors, however, involved legal issues which BnetzA was either not willing, unable or not authorized to advise on. Bidders have to bear the legal costs for any legal advice they seek, which they often likely end up not going for due to costs. BNetzA has recognized this as a deficit and will see to it that bidders are better able to prevent the obvious reasons for exclusion.
  • Moreover, it is also noticeable that many winning bidders belong to one company group. In one case one company with its subsidiaries was granted over 40 % of the total capacity awarded.
  • Already before the start of the pilot tender some voices pointed out that the sites and locations of PV installations might cause problems with this chosen model. This concern was expressed in particular with view to onshore wind energy plants and their future inclusion in the bidding instrument: Such wind projects are likely to be located in coastal regions. However, PV installations are also faced with this problem given that only limited sites are eligible for financial support. Pursuant to §6 para. 3 No. 6 FFAV, bids were accepted for PV installations on sealed surfaces, conversion areas or areas along motorways and railways. In the first tender, 68% of the projects were awarded on conversion areas. However, in order to guarantee enough competition, it is necessary to have sufficient sites available to set up PV installations. The plan now is to extend the range of sites permitted for tender in the following year (including sites managed by BIMA, the German Federal Institute for the Management of Real Estate as well as sites located on farmland in less-favored areas, see §22 para. 1 No. 2 letter. b FFAV as well as definition in §2 No. 2 FFAV). The concluded bidding process shows that the erection of solar parks has mainly concentrated in the new Bundesländer (Federal States) (Brandenburg: 10 installations, Saxony–Anhalt 5 installations) and including the last case also in the more southern Bundesländer. This might be linked to the limited sites available and renders the aforementioned change to the available sites all the more important. However, the bidding process also showed that a focus on sites located more in the southern Bundesländer did not take place 
  • It was reported that the special legal protection model of FFAV, which in a nutshell is the exclusion of “negative” competitor’s action in favor of “positive” competitor’s action (see Dentons Newsletter from February 2015, Section „Appraisal“) has in practice lead to a situation where BNetzA’s decisions to award a bid are not subjected to a judicial review. The unsuccessful bidders shy away from the litigation risk (and costs), considering that they can anyway participate with their project in the next bidding process again. Thus the underlying legislative approach should not be used as a model for future legislative processes because otherwise the justification pressure on the administration is significantly reduced by the judicative power with respect to monitoring legality. This is likely to reduce the quality of the administrative decisions; which of course, is not desired from a rule of law point of view.
  • Other issues, such as systematic questions on investment consolidation for smaller projects are discussed in the legal literature.

Second tender

In the first bidding round, bids were awarded for the respective value quoted in the bid (pay as bid) up to the maximum value and/or tender volume. This gives bidders the advantage that there is no calculated uncertainty with respect to the funding level. However, a disadvantage is that strategic bidding behavior cannot be fully ruled out.  

In the second bidding process running since 8 June (150 MW, tender deadline for 1 August 2015 and/or until 3 August because of weekend), the funding level is determined using the uniform pricing approach, where the funding level is determined on the basis of the maximum bid awarded. All bidders receive the same funding level. The awarded value thus can only be determined if second security deposits were made for a sufficient bid size or if a successful replacement procedure (Nachrückverfahren) was initiated.  

Bidders must use the forms specifically designed for the tender; BNetzA expressly points out that forms published for the tender deadline 15 April 2015 are no longer valid.

Outlook

In the third bidding round (200 MW) bids can be submitted until 1 December 2015 upon the publication of the tender by the BNetzA. There might be other evidence available by then indicating whether the cost efficiency and expansion targets as well as the desired realization rate will be achieved under FFAV. It is certainly not yet possible to make a final assessment after the first tender. Therefore in the 10 Point Energy Agenda of the Federal Ministry of Economics, the evaluation period for FFAV was designed for the entire year 2015. The experiences gained will be laid down in a report to be submitted to the German Bundestag.  

It remains to be seen whether all winning bidders apply for and/or receive a retroactive funding, in other words whether the security concept of FFAV adds up or not.  

Things will certainly remain exciting especially if you cast a view to our European neighbors. Poland, for example, plans to start tenders in the field of renewable energies based on their version of the EEG at the beginning of January 2016.