Germany’s Mechanical Engineering Industry Association, the VDMA, has added its voice to industry bodies that believe a contract for difference (CfD) auction scheme is the best way to attract investment for offshore wind projects
VDMA power systems managing director Matthias Zelinger said he welcomed the amended Wind Energy at Sea Act that was recently agreed by the German cabinet, which set a target to 20 GW of offshore wind by 2030 and 40 GW by 2040.
He also welcomed growing emphasis in Germany on the potential to use offshore wind to produce green hydrogen but lamented the fact that the draft of Germany’s much-discussed National Hydrogen Strategy has yet to be discussed by the cabinet.
“Offshore wind energy is an attractive technology for the production of green hydrogen due to its high full load hours,” said Mr Zelinger. “Designation of areas that can be used for the production of green hydrogen is essential,” he said.
However, Mr Zelinger expressed greater concern that the draft offshore wind legislation approved by the cabinet includes points “that were not discussed satisfactorily” due to the short deadline for commenting on the draft bill.
The VDMA is particularly concerned about a plan to include a ‘second bid’ in the awards process that the VDMA and other industry bodies argues will make bidding for offshore wind projects in Germany less attractive to developers and more expensive to build. In effect, it makes developers pay to develop projects.
“Germany is competing for investment with other countries that are successfully expanding their offshore wind markets, countries that have CfDs, which significantly reduce financing costs. European harmonisation will be necessary here,” he said.
Other industry associations have been more forthright about the likely adverse effect of the German Government’s idea. WindEurope chief executive Giles Dickson said the it amounted to telling developers, ‘You’ve got to pay for the right to build offshore wind.’
“That’s what Germany is proposing,” he said. “If two or more companies bid to build a windfarm purely on income from the electricity market, then Berlin thinks whoever offers to pay the government more should build it.
Germany already allows ‘zero bidding’ where you earn the market price, but the cost of financing zero bid offshore windfarms is 250 basis points higher than those that have a CfD. Banks prefer the revenue stability you get with a CfD.
“Negative bidding would make things even worse,” said Mr Dickson. “Many companies don’t like bidding at zero. Even fewer would want to do that and pay. And who knows what interest the banks would charge?
“No, Germany,” he said, “go for CfDs. They are cheap for government, because you pay out when prices are low but get paid back when they are high, so there are no windfall profits. And they are cheaper for society: the higher finance costs from zero bidding add 25% to the total cost of a windfarm. The UK, Denmark, France and Poland all do CfDs for clean energy.
“Germany wants to build more offshore wind – great! But the industry and banks are not going to want to build it for you if you allow negative bidding,” Mr Dickson concluded. “And you’ll miss out on the jobs.”
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