Following the Fukushima nuclear disaster in March 2011, the German government under Chancellor Angela Merkel made the fundamental policy decision to embark on a sustainable energy turnaround. The government plans to phase out all of the country’s 17 nuclear power plants by 2022 and to expand energy production from renewable sources with the long-term aim of covering Germany’s future energy supply from renewable sources. The government considers the expansion of offshore wind power a cornerstone of the planned energy turnaround.

However, over the course of the past year it has become obvious that the expansion of offshore wind power is stagnating. Several large investors such as EnBW, RWE and DONG suspended the construction of offshore wind farms. Technical and financial difficulties, but also legal uncertainties surrounding the applicable liability regime for the late connection of offshore wind farms to the power grid, have significantly delayed the much-needed grid connections.

The government recently adopted a number of amendments to the Energy Industry Act (Energiewirtschaftsgesetz) aiming to resolve these issues. The changes center around a new liability regime for disruptions and delays regarding offshore power cables and a new binding offshore grid development plan. The amendments entered into force on December 28, 2012.

We hope the client alert is of interest to you.

Prof. Dr. Joachim Scherer

New liability regime for offshore grid connections

The newly introduced liability regime covers delays to the connection of offshore wind farms to the transmission grid, disruptions to the offshore power cables, and also prolonged interruptions for maintenance. In all cases, the wind farm operator is entitled to compensation payments equal to 90 % of the lost remuneration pursuant to the Renewable Energy Sources Act (Erneuerbare-Energien-Gesetz, EEG).

Under the new provisions, the transmission system operator (TSO) responsible for providing the connecting power cable must generally pay damages from the 11th day of continuous disruption or from the 19th day if the power input is disrupted due to several individual events totalling more than 18 days per calendar year. In the event of grid connection delays, the payments kick in on the day the wind farm reaches technical operability, but not before the 11th day after the binding date of completion of the connecting power cable. If grid connection delays are anticipated, wind farm operators may claim damages under certain conditions even if the wind farm is not yet operable. However, the operator must repay any damages received if he later fails to establish the wind farm’s technical operability within a reasonable deadline set by the Federal Network Agency (Bundesnetzagentur). In the event of deliberate delays or interruptions, the TSO remains liable from the first day of delay or interruption.

Unless the delay or interruption was caused deliberately, the TSO may pass through the compensation costs to the other TSOs and, ultimately, the final consumers, by way of a surcharge to the grid usage fee, subject however to certain deductibles based on a sliding scale. These deductibles, which must be borne by the TSO, range from  20 % of the compensation costs for damages up to EUR 200 million per calendar year to 5 % of the compensation costs for damages exceeding EUR 600 million up to EUR 1 billion per calendar year. Damages exceeding EUR 1 billion per calendar year may be passed through in full. Furthermore, except for cases of gross negligence, the TSO’s deductible is limited to EUR 17.5 million per damaging event. However, the TSO bears the burden of proof to exclude gross negligence. This may significantly limit the practical relevance of the liability cap.

The surcharge that may be passed through to final consumers is also capped at 0.25 ct per kilowatt hour. Lower caps apply for consumers with an annual consumption reaching at least 1 million kilowatt hours and also for businesses in the manufacturing industry. This ensures that the additional burden for electricity consumers caused by the socialization of the compensation costs remains within reasonable limits. Any compensation costs that the TSOs cannot recover over the course of a calendar year due to these caps will be rolled over into the next year. Finally, the TSOs’ liability for property damages has been limited to EUR 100 million per damaging event, unless the TSO acted deliberately.

Offshore grid development plan

Under the Energy Industry Act as amended, TSOs are required to jointly develop a yearly offshore grid development plan, spanning from Germany’s so-called Exclusive Economic Zone (Aussschließliche Wirtschaftszone), i.e. the area adjoining the territorial sea where most offshore wind farms are located, to the grid connection points on land. The offshore grid development plan must be submitted to the Federal Network Agency for approval.

In the past, TSOs were required to provide a grid connection for offshore wind farms at the latest by the time the wind farm reached technical operability. This legal requirement prevented a sustainable planning of the offshore grid and in particular the establishment of cluster connections. The new provisions now allow a more systematic planning approach while at the same time obliging the TSOs to implement new connecting power cables in accordance with the time frames outlined in the offshore grid development plan. In this context, TSOs have been given sufficient flexibility to adjust their time schedules to changed circumstances, since they are allowed to change even publicly announced completion dates with the approval of the Federal Network Agency until 30 months prior to the scheduled completion date.

For offshore wind farm operators and investors, this means that their individual right to request the grid connection of the wind farm at a certain due date has been replaced by a right to be allocated capacity for a designated connecting cable by way of a non-discriminatory allocation procedure, which will be carried out by the Federal Maritime and Hydrographic Agency (Bundesamt für Seeschifffahrt und Hydrographie). Instead of a due date determined by the date on which the individual wind farm reaches technical operability, the timing of the new connecting power cables is now governed by the offshore grid development plan and the public announcements of the TSO. However, investors still have a sound basis for their own planning, as the completion date for the grid connection becomes binding as of 30 months before the scheduled date. Also, the TSO and the wind farm operator must closely co-ordinate the time schedules for the realization of the offshore power cable and the wind farm over the entire course of both projects. This ensures that investors are not taken by surprise by delays.

Finally, wind farm operators may lose their right to the allocated capacity if the construction of the wind farm is substantially delayed. However, a grandfathering clause applies to wind farm operators that already received a grid connection commitment by September 1, 2012. 

Outlook

The recent amendments will hopefully provide the legal predictability needed to spur substantial investments in both offshore wind farms and offshore power cables. The deductibles for TSOs under the new liability scheme have been reduced to an acceptable level. At the same time, the improved provisions regarding the timing for the completion of grid connection cables should limit the occurrence of delays triggering liability in the future, so that the practical relevance of the liability scheme and the connected financial burden for electricity consumers will hopefully be marginal. It remains to be seen whether the provisions shifting the burden of proof to exclude gross negligence to the TSO will deter investors from investments in offshore power cables.