Subsidy-free wind farms in the north sea: arranged for
On 21 December 2017, the Netherlands Minister of Economic Affairs and Climate wrote to the Dutch House of Representatives that the first permit applications had been submitted for the construction of a non-subsidised offshore wind farm. A breakthrough in costs for offshore wind power and a necessary step to having wind power compete on a price-driven electricity market. In order to keep this transition on track, a consultation process has been initiated to amend the Dutch offshore Wind Power Act [Wet windenergie op zee] to reflect the future possibilities for wind power. Click here for the consultation documents (in Dutch only).
The current Dutch Offshore Wind Power Act (“the Act”) entered into effect on 1 July 2015. The purpose of the law is to give the national government a supervisory role when it comes to choosing and inspecting sites, and granting permits, for wind farms in the North Sea. For example, this ensures that wind farms are only built on sites designated for that purpose. The national government has designated lots by means of a wind farm site decisions [kavelbesluit] (“Decision”). Such Decisions contain the conditions an operator must meet in order to build the wind farm.
The amendment proposal will not affect the essence of the Act. Wind farms will only be able to be built on sites that are designated in a Decision. Sites will only be designated within areas that are designated as wind power areas in the national water plan formulated pursuant to the Dutch Water Act [Waterwet]. The Decision determines where, and under what conditions, a wind farm may be built and operated. The Decision does not determine who has a right to build and operate a wind farm on the relevant site. The procedure for granting a permit follows the issue of a Decision. Only permit holders are entitled to build and operate a wind farm on the designated site.
New Allocation Procedures
If the Act is amended, there will be four possible options for permit procedures: (i) the procedure with a subsidy grant, (ii) subsidy-free, but subject to a beauty contest, (iii) beauty contest with a financial bid, or (iv) by auction.
The current version of the Act provides for, inter alia, a procedure with a subsidy grant. In this procedure, the permitting procedure runs together with the subsidy grant procedure, and both are awarded to the applicant that requests the lowest subsidy amount. The amendment proposal would retain this procedure. If it is clear beforehand that a subsidy will be needed to build the wind farm in question, this procedure will also be the only option available.
However, procedural options need to be available for situations in which no subsidy is needed. Experience with subsidy-free procedures was gained during the third tender based on the Wind Power Permitting Scheme for Sites I and II on the Dutch Coast (south) [Regeling vergunningverlening windenergie op zee, kavels I en II Hollandse Kust (zuid)].
The proposal prescribes several fixed and mandatory criteria for the beauty contest. The ranking criteria in the proposal relate to the certainty that the wind farm will be built, as well as to the wind farm’s contribution to the supply of power. The amendment proposal also provides for the option of a ministerial decree to set and add ranking criteria that are, for example, specific to a site or which require extra consideration from a societal standpoint at a given time with regard to innovation. The ranking criteria to be added might relate to, for example, wildlife, aquaculture, fishing, safety, or shipping. For instance, the ministry might issue a decree that assigns a higher ranking to a wildlife-inclusive wind farm design that proactively protects wildlife, or a design that offers more options for shipping. A decree might also determine that specific criteria are to be put in place for a given wind farm.
A second change will be the option of a financial bid with a beauty contest. This will create the option of combining a beauty contest with an auction. The substantive results of the beauty contest can then be combined with the financial bid to determine the rank. This is intended to combine financial bids with incentives for protecting wildlife and/or related marine engineering innovations.
A great deal of experience has been gained through government auctions, particularly in the telecoms sector (ether frequencies). According to the explanatory notes to the proposal, this experience was used to draft the auction portion of the amendment proposal. Provisions from the Dutch Telecommunications Act [Telecommunicatiewet] have been adapted to apply to offshore wind power. The auction method can be chosen based on the intended purpose of the auction. When choosing the purpose of the auction, the available offshore wind power sites are allocated as efficiently as possible from an economic perspective by awarding them to the party which can create the most economic value with its development. An important factor to be decided on when opting for an auction is whether it will consist of a single round or multiple rounds. One or two permits will probably be available for each tender. Just as is the case for telecoms auctions, an external audit will be conducted to obtain advice on the best auction method. This audit will compare, and seek reconciliation with, the method used when the permitting procedure runs concurrently with a subsidy procedure.
Security Deposit or Bank Guarantee
The proposal directs that a security deposit or bank guarantee subject to forfeit must be furnished in procedures that do not involve subsidies. In the case of an auction or a beauty contest with a financial bid, the amount paid will not be deducted from the security deposit or bank guarantee.
Start of Construction
The amendment proposes the repeal of the four-year period between the date on which the permit becomes irrevocable and the start of construction and operation of the wind farm, and to have the length of this period set by ministerial decision on a tender-by-tender basis. The thought underlying this is that if the wind farm is connected to an offshore grid, the period between the grant of the permit and the start of construction and operation would continue to be between three and five years long.
Limited Number of Bids
Large enterprises are often structured using a parent company and several subsidiaries. Companies can also be incorporated for the sole purpose of increasing the chance of obtaining a permit: this chance increases in tandem with the number of applications submitted. Note, however, that the amendment proposal requires a company applying for a permit to submit its best “offer” – in the form of a subsidy amount, an amount in the auction, or a qualitative plan when a beauty contest is conducted. Like the Telecommunications Act, the amendment proposal contains a provision that enables imposing a maximum number of applications that an applicant can submit. In the tender from 2016, the subsidy scheme set this maximum at two. It may be desirable, if there are a limited number of turbine suppliers, installation companies, or other types of company, to have one company participate in a limited number of consortia. The amendment proposal provides the option of limiting the number of bids with which a single company can be involved.
The amendment proposes creating an option to limit extensions of the permit by terms of no more than 10 years, up to a maximum of 40 years. This option would allow gradual and flexible intervention relating to developments in the life spans of wind farms. Because of the long term for which a site is used, the amendment proposal contains an option for extensions rather than granting a permit that has a maximum term of 40 years from the outset. Applications for extensions will be assessed in light of other spatial planning interests in the North Sea.
Alternative Energy Carriers
In the future, a need may arise to convert the wind power generated into energy carriers other than electricity, such as hydrogen or ammonia. The amendment proposes readying the Act to route wind power generated offshore directly to industry or convert it to other onshore energy carriers without any connection to an offshore grid or onshore high-voltage grid. The proposal also proposes readying the Act to provide for situations in which offshore wind power can be converted into energy carriers other than electricity.
Interested parties can respond to the amendment proposal until 20 March 2018. Please do not hesitate to contact us with any questions you might have about submitting an opinion.