International Renewable Energy Newsletter - November 2011

15 November 2011

Dr Hermann Rothfuchs, Dr Matthias Lang, Dr. René Voigtländer, Matt Bonass, Michael Rudd, Michelle de Rijke, Sophie Pignon, Wolfgang Hess, Levent Gürdenli

In this issue:


Introduction

We are pleased to bring you the latest issue of the Bird & Bird International Renewable Energy Newsletter.
 
Edited this month by our Frankfurt office, this issue includes: articles on Germany's reaction to the European CCS Directive; an amendment to the Green House Gas Emissions Trading Act; and, the ongoing questions around the nuclear fuel rod tax.

This edition's guest commentary comes from Dr Benedikt Ortmann of Renerco Solar, who outlines 'Solar Industry Strategies in an uncertain environment' and our Dusseldorf Partner, Dr Matthias Lang comments on 'The German Post-Fukushima Energy Turnaround'.  As well as all this we include round-ups on Renewable Energy developments from our offices in Abu Dhabi, Budapest, Paris, and The Hague as well an update on UK Feed-in Tariffs.
 
Otherwise, this issue of the Newsletter provides an overview of other important regulatory and legislative developments across our network of offices.  The next issue in the New Year will be brought to you by our London offices, with further issues later in the year from other Bird & Bird offices across Europe, including Madrid, Milan and The Hague.


Legislation / Regulation

Germany: Federal Council rejects CCS law

Germany missed the deadline of 25 June 2011 to implement the European CCS Directive (Directive 2009/31/EC). On September 23 the German Federal Council rejected the German Parliament's proposal for an Act on the Demonstration and Implementation of Technologies for Carbon Capture, Transport and Permanent Storage of CO2 ("CCS Act"). The German Government started the formal parliamentary mediation procedure to find a compromise on 26 October. As the Mediation Committee adjourned its deliberation on 8 November, it remains unclear when a compromise will be reached, and therefore when Germany will comply with its obligations under Directive 2009/31/EC.

After much controversy, the German Parliament had approved the controversial CCS Act on 7 July this year. The bill provided that applications for demonstration projects have to be made before the end of 2016. The annual storage capacity of an individual site was not to exceed 3 million tons of CO2 per year and 8 million tons of CO2 in total for all demonstration projects. The act is intended to transpose Directive 2009/31/EC on the geological storage of carbon dioxide to the extent that CCS demonstration projects can be carried out until 2017.

Opponents within the Federal Council pointed out their disagreement with the CCS bill. The states North Rhine-Westphalia, Rhineland-Palatine and Baden-Württemberg proposed a more open research in due consideration of ecological and social acceptance. Since climate protection is a task for wider German society, Hamburg, Saxony and Brandenburg criticised a clause which gives the federal states the right to designate areas for CCS pilot projects as well as areas in which such projects are not allowed.

As the bill is a so called consent law, consent by the Federal Council is required under German constitutional law.  A lack of consent cannot be remedied by another Parliament's vote in favour of the bill. Hence, the objection by the Federal Council meant that the bill could not enter into force. In light of the obligations under Directive 2009/31/EC, the Federal Government decided to exercise its constitutional right to invoke a mediation procedure to find a mutually agreeable compromise. But in view of the different standpoints on CCS, it remains unclear how a compromise may be reached.

As the CCS Directive should have been implemented into German law by 25 June this year, the European Commission allegedly started infringement proceedings for non-compliance.

Germany: Amendment on Greenhouse Gas Emission Trading Act Published

On July 21 this year the Law for the modification of the legal basis for the further development of emission trading, an amendment of the Greenhouse Gas Emission Trading Act ("TEHG"), was published in the Federal Law Gazette. The amendment of the TEHG implements the EU ETS Directive (Directive 2009/29/EG) on the greenhouse gas emission allowance trading scheme of the European Community into German law.

The EU ETS Directive shall introduce a centralised EU-wide cap on emissions and a fully harmonised European allocation system for emission allowances. The installed TEHG integrates the rules of the European emissions trading regime into the German legal system and prepares emissions trading in Germany for the next trading period.

As of 2013, the overall emission amount for all facilities subject to the emission trading obligation will be reduced annually by 1.74% of the average annual level of the cap for the second trading period from 2008 to 2012. The centralised EU-wide cap on emissions is supposed to deliver a reduction of 21% below 2005 verified emissions by 2020. In this way, emissions trading is the key instrument to reduce greenhouse gas emissions in Europe.

According to Directive 2009/29/EG, air transport within the territory of the EU will be included in the EU ETS as of 2012. With the start of the third trading period in 2013, the EU ETS will be further expanded to the petrochemical, ammonia and aluminium industries and to additional gases.

Starting 2013, uniform EU allocation rules will be the basis for allocation for all Member States. The number of auctioned emission allowances in Germany will be about five times as high as between 2008 and 2012. More than 90% of the revenues from the auctions will be used for national and international climate protection projects and for the implementation of the German energy concept.

To the extent the additional revenues exceed 900 million Euros allocated to the federal budget plus costs of the German emission trading scheme administration, revenues shall go into a German energy and climate fund.

France: New rules to promote large-scale development in the wind energy sector

The decrees governing the entry of wind turbines under the legislation covering listed Installations for Protection of the Environment (ICPE) were published August 25, 2011.

According to the Government, the ambitious goal of the Grenelle Environment forum - to increase the consumption of renewable energy to 23% by 2020 - cannot be achieved without a strong deployment of onshore wind energy.

It is one of the most competitive renewable energies and represents one quarter of the potential development of new energies in France. This is expected to grow from 6 GW today to 19 GW by 2020. Although the French market for onshore wind is now one of the most dynamic in Europe, its growth, as in other European countries, faces long procedures and encounters a high level of local legal challenges.

To overcome these obstacles, Nathalie Kosciusko-Morizet, Minister of Ecology, has announced modernization of the regulatory rules regarding wind turbines. "The deployment of wind power on earth can only be achieved within two conditions: transparent procedure which is reliable and speedy for operators, and its acceptance by local people. By providing guarantees to both parties, the new regulatory framework should give a boost to that energy".

The texts published recently now define the administrative arrangements applicable to wind farms, detailing final dismantling obligations, and establishing a system of financial guarantees to ensure dismantling in case of failure.

The new system will prevent damage to landscapes, to heritage and quality of life for residents. It will also reduce the time taken in preparation for the vast majority of projects (up until now, 2-4 years).

The new system will also give project developers better predictability for wind farms, and public input will be better taken into account for each project.

Hungary: New support scheme for renewable energy on the horizon in Hungary

The hot topic of this autumn was the announcement of the Hungarian Government and the Ministry of National Development ("Ministry") on the general concept of the new support scheme for renewable energy sources.  The energy sector was expecting this move, as the mandatory takeover system (feed-in tariff system, in Hungarian: "KÁT") was modified as of 1st July 2011, which effected many blank areas in the existing support system, plus the new support scheme should also 'resolve' historical gaps in the existing KÁT system.  However, the Ministry did not want to disclose any further information on the changes to come, since the 1st July amendments to the KÁT-system.

Finally in September, the Ministry published its general concept on the new subsidising system. The new support scheme is called: "subsidising system of the taking over of heat- and electricity generated from renewable and alternative energy" (in Hungarian: "METÁR").

According to the Ministry, the introduction of METÁR-system is necessary because the proportion of the renewable energy sources can be increased to 13%, which is the mandatory target Hungary needs to meet by 2020 under the 2009/28/EU Directive, or even to 14,65%, as it is prescribed by the National Action Plan, only if energy price subsidies and mandatory takeover is provided.  Under the current KÁT-system these goals cannot be achieved.

The four main principles of the METÁR-system are sustainability, utility, stability and long-term predictability, and according to its general concept it will include:

  • Promotion of cogenerated heat- and power.
    Introduction of strict sustainability criteria regarding forestry biomass, according to which only such wood can be used in the biomass power plants which originate from sustainable forestry, and the respective certificate-granting system will be worked out by the Ministry of Rural Development.
  • Establishing maximum capacity regarding biomass power plants depending on the type of energy source.  In practice this would mean that in order to decrease the transportation costs of the raw material and to use local circumstances effectively, the upper limit of forestry biomass power plants is 10 MWe.  Furthermore, biomass power plants with a capacity exceeding 10 MWe may not receive subsidy, unless they supply the district heating system as well - in this case the upper limit is 20 MWe.
  • Differentiated feed-in tariff based on different technology and capacity.  The three pillars of the METÁR-system are: (i) electricity base price; (ii) green heat bonus price; and (iii) other bonus price.  These support schemes and the conditions for benefiting from them will be determined in a new law to be introduced.  Feed-in tariffs will be reviewed every two years, except for PVs where the review will be made annually.  In case of technologies capable of cogenerating (biomass, geothermal energy) the base price will be determined in such way that the financial return will only be ensured if heat- and cooling bonus is used.  In case of other technologies (PV, wind, water and biogas) the maximum price will be corrected on the basis of the aims of the National Action Plan and the types of the investment.
  • Application of supplementary bonuses based on national economic requirements. Depending on the type of the renewable energy source these bonuses may be given, among others, in the following cases: (i) realisation in one of the most disadvantaged regions; (ii) heat bonus, which can be granted with respect to periods when the energy source generates heating; (iii) cooling bonus which can be granted with respect to periods when the energy source generates cooling; (iv) equalising bonus, which can be granted with respect to a power plant using adjustable energy source, such as biogas, is cooperating with a power plant using non-adjustable energy source, such as wind, in order to counterbalance each other in the grid.
  • Term of the subsidy will be 15 years, regardless of the renewable energy source.  In case of biomass and biogas, after the expiration of the fixed 15 years the power plants may receive the so-called 'brown' tariff (in Hungarian: "barna tarifa").  Brown tariff may only be given to such technologies the operation of which is not profitable due to high raw material costs (e.g. biomass power plants using wood).
  • Establishing minimum efficiency requirements.
  • Determining regional sustainability quotas.
  • Determining the amount of the quotas that can be allocated in every two years.  The allocable quotas will be determined by law. The introduction of quotas basically means that the number of energy generators will be limited, since they will be based on social advantage and sustainability.  It must be noted that, in principle, quotas will be applied as with respect to new joiners.

The proposed METÁR-system will include the following four elements:

  • (i) In case of cogenerating technologies, provision of green heat bonus beyond the feed-in tariff base price.
  • (ii) The amount of the feed-in tariff base price is determined on the basis of the type of the technology and size; in case of cogenerating technologies the base price will be determined in such a way that the return of the investment will only be realised if green heat bonus is given as well.
  • (iii) If certain conditions are met, beyond the feed-in tariff base price certain bonuses may be given, e.g. development in one of the most disadvantaged regions, exceptional efficiency, innovative technology etc..
  • (iv) Provision of a 'brown' tariff. 

The METÁR-system will require a stricter monitoring system as compared with the current one.

According to the proposed METÁR-system, the minimum and maximum subsidised capacity of PV power plants will be 50 and 500 kWp (the subsidy provided for PV power plants with a capacity lower than 50 kWp will be assessed by the legislator separately), while in terms of wind power plants the minimum capacity will be 0,5 MWe.

The Ministry called the stakeholders to take part in a consultation procedure whereby they could submit their comments by 16 September 2011.  No information regarding the outcome of this consultation procedure has been made available yet.

The general concept of the METÁR-system does not include the exact amount of the feed-in tariff and the details of the subsidy scheme still need to be worked out.  As the proposed METÁR-system will be based on subsidies provided by the Hungarian State, the approval of the European Commission will have to be obtained.

An issue that raises concerns among the stakeholders currently receiving KÁT subsidy is the question of whether the new system will concern their existing contract or not.  The Minister of State for Climate and Energy Affairs, Mr. János Bencsik ("Minister") has declared in an interview that these contracts will be respected, since the return of the investments has to be ensured, although he did not give any firm answers.  The Minister also added that there can be an option that the investment return period of the KÁT contractors and METÁR contractors will be set uniformly to 15 years.  We managed to talk to a renewables market analyst working at the Hungarian Energy Office ("Analyst"), who confirmed that the contracts concluded under the KÁT-system will be respected; only biomass power plants having an existing contract will have to meet the sustainability criteria mentioned above.

The Analyst has disclosed information regarding the expected schedule on the preparation and adoption of the METÁR-system from the Hungarian Energy Office's ("HEO") point of view:

  1. Since no particular prices can be found in the general concept of the METÁR-system, the HEO's task will be to determine the amount of the base price and bonus prices related to each renewables energy type by the end of October 2011.
  2. The "updated" and more detailed version of the METÁR-system will be discussed by the Ministry and the HEO.
  3. Once agreed, the "updated" version of the concept of the METÁR-system will be submitted to the Government.
  4. If the Government accepts the "updated" version of concept of the METÁR-system, then it will be submitted to the European Commission for approval.
  5. If the European Commission gives a green light to the METÁR-system, then the preparation of the legal background will begin.
    According to the original plans, the METÁR-system will enter into force from 1 January 2011 provided the European Commission gives its approval. In case the European Commission rejects the METÁR-conception in its current form, then further delays can be expected.

According to certain media sources, the Government is planning to prepare different action plans, as well as a new energy regulating system by the end of Q2 2012.

UK: Feed-In Tariffs Update

Fast track consultation results

One of the previous editions of the Bird & Bird Renewables Energy Newsletter reported on the launch of a fast-track consultation of the Feed-In Tariff ("FIT") scheme by the UK Government. The consultation proposed reducing the generation tariffs available for solar photovoltaic projects above 50kW. The consultation was launched due to a perceived threat that the money available for FITs would be diverted from the domestic level (for which they were primarily intended) to the above 50kW commercial schemes, due to the attractive rates of return that financial and equity investors could achieve on the larger schemes.

The consultation period closed on 6 May 2011 and the Government published its response to the consultation on 9 June 2011. In its response, the Government confirmed that from 1 August 2011 new lower rate tariffs would apply to solar photovoltaic ("PV") installations between 50 kWs and 5 MWs.

The new tariffs that were set to apply to installations commissioned on or after 1 August 2011 were:

  • 19p/kWh for 50kW to 150kW;
  • 15 p/kWh for 150kW to 250kW; and
  • 8.5p/kWh for 250kW to 5MW and standalone installations.
    This represented a 42% reduction in the 50-150 kW banding rate and a reduction of 51% for the 150 – 250 kW banding rate when compared to the rates that applied to that point from 1 April 2010 (32.9p/kWh for 10kW to 100kW and 30.7p/kWh for 100kW to 5MW and stand-alone installations).

The "Extension Loophole"

Following the reduction of the FIT tariffs from 1 August under the fast track consultation, the UK Government subsequently launched a further consultation on 27 July 2011 to close a loophole in the FIT legislation. This loophole potentially allowed developers of large scale photovoltaic installations who commissioned an installation before 1 August 2011 (i.e. before the first revised FIT tariffs came into effect) to be eligible to receive the pre-1 August FIT rates for additional capacity that they subsequently install onto the original installation up to a year afterwards. The Government considered that this was inconsistent with FIT policy following the fast-track consultation and aggravated the spending risk that the fast-track consultation was intended to address.

Article 15 of the Feed-in Tariffs (Specified Maximum Capacity and Functions) Order 2010 (the "Order") stated that where the total installed capacity of an accredited FIT installation is extended within 12 months of the original installation becoming eligible to receive FIT payments, then Ofgem (the UK administrator of the FIT scheme) is required to treat the extension "as if it were part of the original eligible installation for the purposes of accreditation". Ofgem guidance further stated that the new extended installation would have the same eligibility date for receiving FIT payments as the original installation. The result of this being that, if a developer registered a photovoltaic installation of 100kw pre-1 August 2011 and then subsequently extended this installation to 5MW within 12 months, the pre-1 August tariff rate would apply for the whole 5MW installation. For this loophole to apply, the capacity of a FIT accredited installation would have to be extended using the same technology type as the original installation.

The consultation has now closed and the Government published its response on 27 September 2011 announcing that Article 15 of the Order would be amended to close this loophole. Under the new Article 15,  an extension completed within 12 months of the original installation becoming eligible to receive FIT payments will be subject to the same rules that apply to an extension that is completed more than 12 months after the original installation became eligible to receive FIT payments. The tariff of the original installation will remain unchanged. However, once it has been commissioned and accredited, the extension will be given a separate tariff code and have a different eligibility period.

The tariff code assigned to the extension will be based on the total installed capacity of the original installation and the extension, and on the rates that are in force as at the eligibility date of the extension (not the original installation). These new rules on extensions will apply to all extensions unless they were commissioned, and Ofgem or licensed suppliers received notice in respect of them, before 18 October 2011. There were concerns during the consultation process that extensions could only be notified to Ofgem in relation to accredited installations. The Government therefore included a transitional provision to deal with the scenario where an extension had been commissioned before 18 October 2011 (i.e. before the amended Order came into force) but where the original installation had not yet been accredited due to a delay in the accreditation process. Under these transitional provisions, in the interim period before 18 October 2011 the old rules on extensions continued to apply:

  • where an extension was made to an accredited installation and that extension was commissioned and notified to Ofgem before the commencement date of the amending Order;
  • and where an extension was made to an eligible installation that was commissioned and had already applied for accreditation (and was subsequently accredited), and that extension was commissioned and notified to Ofgem before the commencement date of the amending Order.

Comprehensive Review

Despite the reduction in the FIT tariffs from 1 August under the fast track review, the Government has recently launched a further comprehensive review of the FIT scheme. This has been launched in order to deliver further savings in the FIT scheme and, in particular to protect the spending envelope that is earmarked for the FIT scheme. The consultation has been split into two phases, Phase 1 and Phase 2.

Phase 1 of the comprehensive review has the principal objective of consulting on a further reduction in FIT tariffs and the timing of these reductions. The government argues that these are necessary as costs associated with PV installations have fallen by at least 30% since the FIT scheme started. This, combined with the rising price of electricity means that the returns available to owners of PV installations are now substantially higher than the 5% rate of return originally envisaged. The government further argues that this is not a sustainable position and risks: (i) breaching the spending envelope that is in place for the FIT scheme; and (ii) overcompensating owners of PV installations. This would not provide consumers with optimal value for money, who, ultimately pay for the FIT scheme through their energy bills. The government has therefore proposed to reduce the tariffs for PV installations up to 250 kW as follows:

  • 21p/kWh for installations up to 4kW;
  • 16.8p/kWh for 4 kW to 10kW;
  • 15.2p/kWh for 10kW to 50 kW; and
  • 12.9p/kWh for 50kw to 250kW.

Installations over 250kW will retain the 8.5p/kWh tariff set in the fast-track review. Under the proposals, the new tariffs will apply to PV installations with an eligibility date on or after 12 December 2011. Such installations will receive the post-1 August rates until 1 April 2012 when the tariff will be reduced to the new levels. Any pre-existing accredited FIT installations will retain their existing rates and new installations that have an eligibility date before 12 December 2011 will receive the post-1 August rates for the full 25 years.

A further proposal of the Phase 1 consultation is to introduce new multi-site rates for projects where a FIT generator or nominated recipient receives payments from multiple FIT installations at different sites. It is proposed that these new rates will apply to all new PV installations with an eligibility date on or after 1 April 2012 that form part of an aggregated scheme. Phase 1 proposes that an aggregated scheme is where: (i) a FIT generator is either the FIT generator or nominated recipient for FIT payments for any other installation; and (ii) a nominated recipient for FIT payments is either the FIT generator or nominated recipient for payments for any other installation.  Due to the economies of scale associated with aggregated installations, the FIT rates for new aggregated installations are to be set at 80% of the standard tariffs proposed in the Phase 1 consultation, except for installations over 250kW, which will retain 100% of the tariff rate proposed by the Phase 1 consultation for individual installations.

Phase 1 of the comprehensive review also sets out a proposal that PV installations: (i) with an eligibility date on or after 1 April 2012; and (ii) that are attached to buildings, will only be entitled to 100% of the new tariffs proposed by the consultation where the building to which the panels are attached meets a certain level of energy efficiency. Where the owner of the installation is not able to demonstrate this, the installation will be eligible for a fixed tariff of 9p/kWh. As a transitional arrangement, the government proposes that PV installations with an eligibility date between 1 April 2012 and 31 March 2013 will be given 12 months from their eligibility date to comply with the new energy efficiency requirements. During those 12 months, the PV installation would receive the applicable tariff rate proposed by the Phase 1 consultation.

Phase 1 of the comprehensive review will close on 23 December 2011. The Government is likely to be strongly challenged on the level of the new tariffs and the need for such urgent intervention. Whether the Government will be open to flexibility here remains to be seen. The Phase 2 consultation of the comprehensive review is due to be announced before the end of 2011 and will consider wider administrative issues alongside specific aspects such as cost control mechanisms and tariffs for non-PV technologies. Any changes brought about by this consultation are due to be implemented in the first half of 2012.


Case Law / Proceedings

Germany: German Federal Fiscal Court may have to decide on the nuclear fuel rod tax

In the context of last year's extension of the operating times for nuclear power plants, the German government had introduced a new fuel rod tax. The new tax was intended to contribute EUR 2.3 billion to the German budget. Despite this year's decision to exit nuclear power generation in Germany, the government wanted to uphold the tax. Two lower finance courts have recently considered the fuel rod tax unconstitutional. The German Federal Fiscal Court may have to pronounce a judgement concerning the nuclear fuel rod tax.

In June this year RWE AG and E.ON AG filed a lawsuit against the nuclear fuel rod tax levied on newly installed rods in their jointly operated nuclear power plant Grundremmingen before the Finance Court in Munich. In September the Finance Court in Hamburg decided in favour of E.ON AG and claims the unconstitutionality of the nuclear fuel rod tax for their plant Grafenrheinfeld. The same decision was made by the Finance Court in Munich in October. Furthermore both courts allowed an appeal in this legal action before the German Federal Fiscal Court.

The nuclear fuel rod tax is levied on plutonium and uranium fuel rod newly installed in the nuclear power plants. The tax was introduced in 2010 in connection with the nuclear extension, which formed part of the government's energy concept. After the nuclear accident in Fukushima, Japan, the government backtracked on nuclear extension and proposed a nuclear phase-out until 2022.

The government claims that the legal reasons given for the law do not state a connection with the nuclear extension. Budget consolidation would require the nuclear fuel rod tax. In addition, the tax should also contribute to pay for costs associated with the former salt mine Asse II, which was used to test nuclear waste disposal between 1967 and 1978.

However, RWE AG and E.ON AG are convinced that this tax is unconstitutional. They argue, the Federal government was exceeding its competence as the tax cannot be seen as an excise tax. The Finance Courts in Hamburg and Munich followed that argument and thus decided in favour of the operators of the German nuclear power plants. The claimants also pointed out that the nuclear fuel rod tax violates fundamental rights as well as the law of the European Communities. However, the courts did not deal with these arguments as they assessed formal unconstitutionality.

Germany: German Energiewende reaches Federal Fiscal Court

The political shift towards more cleantech energy has not only kept the German legislators busy, but has also become an issue for the German fiscal courts. The German Federal Fiscal Court (BFH) has now ruled - in the taxpayers' favor - on the depreciation of a wind farm (BFH, decision of 14 April 2011).

The plaintiff, a German funds established in the legal form of a GmbH & Co. KG (an income tax transparent partnership), had opened up a wind farm in 2001. In the fiscal year 2001 as well as in the fiscal year 2002, the whole wind farm facilities had been subjected to a uniform depreciation over a 16 year lifetime period for tax purposes. In the upcoming tax field audit, the tax auditors argued that in fact the wind farm was not one single, but several business assets all of them to be depreciated at their individual rates.

In its judgment, the German Federal Fiscal Court as the second and final instance has now accepted that for tax purposes all assets of a wind farm may be depreciated following one single rate of depreciation and over the same economic lifetime. The court stressed that under German GAAP laws which, as a matter of principle, are indicative for German (corporate) income tax purposes unless specific tax rules apply, not the wind farm as a whole but its individual assets have to be evaluated and are subject to deprecation for tax purposes. Consequently, external cables and access routes to a wind turbine are separate assets. However, even these separate assets serve the same purpose as the wind turbine does. This impacts their economic lifetime. Therefore, it is acceptable for German tax purposes to apply the economic lifetime and depreciation rate of the wind turbine to these other assets as well, even if that will lead to a faster depreciation and eventually to tax-savings.

Example: The tax office argued in the underlying case that the access lanes and the cabling have respective economic lifetimes of 19 and 25 years in contrast to the wind turbine (16 years). The German Federal Fiscal Court determined a uniform economic lifetime of 16 years for all assets.

The new decision should be interesting not only for wind park investors in Germany, but also for investors in other German large-scale plants. In spite of the new court ruling, investors should still consider and document carefully a purchase price allocation to the single assets.


Current developments
 
Germany: 2011 Monopolies Commission Report on Competition in Gas and Electricity Markets

In September the German Monopolies Commission presented its third report on the energy market, entitled "Energy 2011: Development of Competition with Light and Shade". The Monopolies Commission is a permanent and independent commission, advising the German federal government on competition policy and regulations. Its report contains a detailed market analysis as well as general recommendations and recommendation with regard to more competition in electricity generation, on gas purchasing markets and the energy wholesale market.

As the title of the report indicates, the Monopolies Commission sees improved competition on the energy markets compared with its 2009 report. Significant impairments on the generation level in the electricity sector and due to the concentration of the gas supply are declared as the major competition shortcomings.

With respect to the gas market, the report points out that companies from gas exporting countries in particular still have significant market power. Though the expansion of the gas pipeline network, the LNG trade as well as regulation on gas markets had a positive impact, European gas markets should be further connected to create a common trading area.

A decrease on the electricity generation markets, which traces back to the withdrawal from nuclear energy of the German government, is considered to continue. Hence the Commission recommends improving control over these markets and ensuring their effective functioning by setting up a German market transparency agency.

The Commission predicts that the expected increase of electricity generated from renewable energy sources is likely to have a negative impact for customers. It demands changes concerning the promotion of renewable energy sources and calls for a switch to a more market-oriented system. It suggests introducing a quota scheme in which energy traders would be obliged to purchase a certain share of renewable energy for their portfolio.

More competition is required in the power grids and on the end consumer market, the Monopolies Commission says. Furthermore the Commission proposes a much stronger coordination of the main aspects of the energy policy, in particular regarding the security of supply and the environmental policy, at an EU level.

To ensure the security of supply, capacity markets are suggested to encourage investment in flexible power plants. The Monopolies Commissions wants to deal with this matter in its next special energy report after having examined whether an investment problem exists. However, the concept of capacity markets is controversial. The German Section of the European Federation of Energy Traders (EFET) demands to strengthen the liberal market design on the European level, arguing that free markets were best suited to ensure that the necessary investments were made. Instead of creating capacity markets, Statkraft, suggests removing remaining barriers in the German market.

Germany: Power Plant Capacity List Available

The German Federal Network Agency ("BNetzA") published a detailed list showing German power plant capacity as of 14 November 2011.

The shift in Germany's energy policy after Fukushima resulted in the passing of an energy legislative package in July, which provided for a staggered phase-out of nuclear power until 2022. Since the 13th amendment of the Atomic Energy Act ("AtG") gives BNetzA the right to designate a back-up power plant, it has been charged with establishing the German power plant capacities to decide whether to exercise this right, which it meanwhile refused.

BNetzA prepared a list of German power plant units, containing details regarding the name and location of the power plant, the energy source used, output, voltage and operating status. The net capacity of all 676 units added up to roughly 112 GW as of 26 September 2011. The data was supplemented and validated, as operators of power plants with a minimum capacity of 20 MW were asked to inform BNetzA about changes by filing in a questionnaire by 31 October 2011. As of 14 November 2011 the list contains 681 units with a power plant capacity of still nearly 112 GW.

In view of the relevance for the security of supply, BNetzA also provided data on expected new capacity and the decommissioning of power plants with a net capacity of at least 5 MW. Hence, the agency also made available the main data of 26 power plants under construction, adding up to roughly 12 GW, as well as of 18 plants expected to be decommissioned by 2014.

Accelerated development of biomass energy: 15 projects selected

Fifteen biomass energy production projects have been selected by Nathalie Kosciusko-Morizet, Minister of Ecology, and Eric Besson, Minister for Industry, following a tender launched one year ago.

The Government has also decided to go twice as far as expected, by selecting 420 MW of projects, instead of 200 MW, which was the initial target.

The government claimed that: "This higher goal will accelerate the development of the biomass energy industry, to fulfill the objectives of the Grenelle Environment forum. These projects bring about development and local jobs: providing heat and electricity for local use and creating opportunities for the local timber industry. "

Nathalie Kosciusko-Morizet believes that: "The 15 selected projects will contribute very significantly to the development of renewable energy, but also to the structuring of this sector and the mobilization of our forest resources. They will generate 1.4 billion Euros in investments and create new green jobs. "

Eric Besson also expressed his wish "to combine energy and industrial policies. I wanted us to accelerate the development of production from wood and plant waste as it is a good way to generate electricity and because it allows the development of local jobs both on the site and in the local area with the mobilization of the timber industry. For example, the activity of electricity generation at the site of Gardanne is thus perpetuated. "
 
France Biomass

Indeed, biomass (excluding biofuels) will represent over one third of the renewable energy developments in France in 2020 and selection of these projects appears to be a new step towards increased production capacity in France.

It also complements actions taken within the framework of the Grenelle forum:

  • For combined heat and power production plants of medium size (5-12 MW): doubling of prices in January 2010
  • Facilities for small sawmills: preferential feed-in tariff from 1 MW since January 2011
  • For community heating systems, residential community, agriculture, industry: development of renewable heat fund (1.2 billion Euros for 2009-2012) and the first tenders were a great success with 91 projects funded, representing a production of 0.5 Mtoe from biomass, 30% higher than the original objectives. A fourth tender was launched September 6, 2011
  • Biomass boilers for individuals: tax credit for sustainable replacement operations.
  • Another tender for energy production from biomass will be launched by mid-2012.

Dutch government launches 'Green Deals'

The Dutch government has launched an initiative to foster public-private cooperation for sustainable energy, which has resulted in the presentation of 59 Green Deals in October.

The idea is to encourage initiators to set up a project, with the government taking away impediments such as legislation or support. Participants can submit their ideas to a designated governmental task force.

The Green Deals are an important part of the ambitions expressed by the government as expressed in its sustainability agenda. This agenda has a focus on five sectors that are considered most likely to be successful: water- and land use, food, mobility, climate and energy and commodities and product chains.

The current round of projects has resulted in Green Deals in the fields of energy saving, sustainable energy, sustainable mobility and sustainable use of resources and water.

Examples include:

  • A water regulatory authority is going to produce renewable energy using slime.
  • The agriculture sector is going to team up with energy companies to extract biogas from manure.
  • In 2015 all new building in Amsterdam will be climate neutral.

One of the most significant Green Deals was entered into by the operators of coal fired electricity plants, with an initiative to maintain the use of biomass until 2015. The Dutch Energy & Utilities team of Bird & Bird LLP was instructed by the operators to draft the contractual arrangements for this scheme.

Stimulating of renewable energy by Dutch government more effective in 2012

Following the overhaul of the stimulation scheme for renewable energy production (SDE+) in early 2011, the Dutch government announced a new round of the SDE+ scheme for 2012 with an available budget of 1.7 billion Euro.

It is expected that new proposals may be submitted from 31 January 2012 onwards.

The goal of the SDE+ is to accommodate the production of renewable energy using wind-, biomass-, heat- (combined heat and power, terrestrial heat), green gas and solar sources.

The structure of the SDE+ aims to select the most efficient producers, by offering relatively low budgets (7 Eurocents/kWh for electricity, 48.3 Eurocents/Nm3 for green gas and 19.4 Eurocents/GJ for heat). The remaining budgets will become available with higher prices in following years.

A new element of the SDE+ is that the possibility to for 'banking', i.e. to transfer unused budgets to following years. At the same time, producers with a budget of more than 400 million Euro become liable for a fine of 2% of their budget in case these budgets are not used in time.

The government aims to introduce a new tax on energy consumption in 2013, in order to pay for all subsidies granted under the SDE+ scheme.
 
Abu Dhabi: Renewable Energy Developments

Background

The United Arab Emirates (UAE) is a critical partner in the global energy supply chain with one of the world's largest proven oil reserves (Abu Dhabi holding approximately 94% of the UAE's oil reserves1), and natural gas reserves. However, in recognition that oil is a finite resource, the UAE is taking steps to diversify its economy and energy resources to help ensure future energy security.

The UAE, (in particular Abu Dhabi and Dubai) has been investing in various other sectors and taking steps to drive the development of renewable and energy efficiency projects to help decrease dependence on oil & gas and move towards a sustainable energy efficient, knowledge-based economy. The framework for some of these developments can be seen in Abu Dhabi and Dubai's respective urban development plans2 and other socio-economic plans.3  A notable and well known example of how these ambitions are being realised is Abu Dhabi's renewable energy initiative, Masdar (The Abu Dhabi Future Energy Company), which is developing a carbon neutral city in Abu Dhabi along with other pioneering projects in the UAE and beyond across the full spectrum of renewable energy and sustainable technologies.

To date all of the existing renewable projects in the UAE have been, or are being developed, without the sector having a full legal and regulatory framework dedicated to renewable energy and sustainable technologies of the sort common in other markets wishing to also promote investment of this type. Given the Government's vision and targets, the interesting question is to what extent the development, investment and integration of the renewables sector can be, and/or will continue to be, developed as it has to date (i.e. on a project by project basis) without changes to the existing legal and regulatory framework which is targeted to the development of that sector.

Targets

With domestic demand for power expected to more than double by 2020, Abu Dhabi aims to meet this demand, in part, with 7% renewable energy power generation capacity by 2020 (1,500MW of centralised and distributed solar generation)4 and Dubai with 5% by 20305 along with a 30% reduction in energy consumption by 20306.

These are significant targets and Abu Dhabi in particular has taken steps to achieving its targets with Sham 1, 100MW Concentrated Solar Power (CSP) plant in the Western Region, Noor 1, 100MW Photovoltatic (PV) plant (currently being procured), smaller-scale solar and wind projects, the roll out of a solar roof-top program and steps towards a "smarter" grid.

Enabling growth

As renewable energy is a largely new area of the market, an essential component to grow this sector is foreign direct investment, along with support from international financing organisations or multilaterals7, this is in line with the estimation that private investment in renewables could reach $100 billion by 20208.

Broadly, investors, developers and other stakeholders will apply the same considerations as to whether they enter the UAE as they do other markets. These include for example political risk, operation and maintenance risk, market risk, permitting, technology, contractual structure, and the regulatory framework9. Other political, infrastructure and technology issues specific to the region (e.g. regional grid constraints and access, off-take arrangements, subsidies, technology risk), will also be relevant for investors. Clear regulation and government policy, along with greater communication between the public and private sectors10, is therefore an important part of providing stakeholders with confidence for investing in renewable energy projects. This in turn will also enable and promote the transfer of technology, expertise, training and skills which will all contribute to the general growth of sustainable development11.

Legal framework

In the electricity and water sector, each Emirate has its own policies and regulations, and there are separate electricity and water authorities governing the sector in the respective Emirates.  Abu Dhabi, and more recently Dubai, also have an independent Regulatory and Supervisory Bureau (RSB) for the water, wastewater and electricity sector.

Abu Dhabi

The RSB in Abu Dhabi is the independent regulator of the sector and governs the licensing of regulated activities (including generation, distribution and supply of electricity12). Those carrying out regulated activities require a licence to do so pursuant to Law No. (2) of 1998 concerning the Regulation of the Water and Electricity Sector (Article 82). There are different types of licences available, for example, major licences for larger scale generation, small scale licences, and development licences; those granted to date are publicly available on RSB's website13. The regulations also permit certain facilities to apply to the RSB for an exemption from the requirement to be licenced, which includes small scale generation or self-suppliers14. Accordingly, the licensing framework can, and has, allowed alternative forms of embedded generation to contribute to the energy matrix.

The existing legislation and structure in Abu Dhabi for large scale conventional energy projects is based the on the bankable, tried and tested, Independent Power and Water Producer (IWPP) model, whereby the generators benefit from a direct off-take agreement with Abu Dhabi Water and Electricity Company (ADWEC), the "Single Buyer and Seller" of water and electricity in Abu Dhabi. ADWEC is obliged to purchase power "on the best terms reasonably obtainable, having regard to quality, quantity and nature of the things to be purchased"15. Without any legislation specific to renewable energy projects, this obligation creates difficulties where the cost of generating from renewable resources is more expensive than power from conventional generation utilising gas. In the Shams 1 solar project, this issue was circumvented with a subsidy in the form of a "Green Payment" (essentially a one off Feed in Tariff) from the Abu Dhabi Government to compensate ADWEC for the cost of production and subsidised electricity supply.  It is understood that this will be applied to forthcoming projects until such time that new regulation is introduced.  This innovative structure demonstrates what can be achieved in a developing sector where no specific legislation exists for renewable energy generation.

As the legal and regulatory framework is still developing to match this rapidly evolving industry, projects in Abu Dhabi are largely dealt with through the duties and activities of Masdar, the RSB, and Abu Dhabi Water and Electricity Authority (ADWEA) on a project by project basis - as demonstrated by Shams 116. Although recently, positive policy steps in Abu Dhabi and Dubai have been taken in forming an energy strategy (Dubai's Integrated Energy Strategy, and Abu Dhabi's anticipated Energy Vision for 2030), it is hoped that, within existing and new institutional structures, policies will be developed which will in turn bring regulation and guidance to help the renewables market (small and large scale) grow and targets be achieved. One such advancement is Abu Dhabi's 500 MW roof top solar scheme which proposes to introduce a two phase financial incentive to encourage investment: a rebate payment to be paid upon approval of the installation and connection to the grid and then a feed in tariff paid per kwh produced and fed into the grid.17

Dubai

Dubai is also taking steps to diversify its energy sources and open up the sector to private investment. Recently, a new law18 was passed to allow private sector participation in power and water projects in Dubai and to establish a Regulation and Supervision Bureau for its water and electricity sector, which is also given the power to issue licences (and exemptions from requiring a licence) to entities for Regulated Activities,19 and to establish rules and criteria for the exercise of the Regulated Activities. In line with this development, DEWA and the Supreme Council of Energy, issued a tender for consultation services for the connection of renewable generation to the distribution and transmission networks of Dubai.  It is evident that changes are on their way and industry players will no doubt eagerly be waiting the outcome of the various consultations and consequential changes to the sector.

Behavioural Change

Another important factor for the success of the renewable energy industry is the encouragement of behavioural change amongst consumers so that they become responsible for their energy consumption. The Middle East has one of the world's highest carbon emission levels20 and the current artificial subsidies for fossil fuels is also considered to be a barrier for the progression of solar technology - particularly because although the price of certain renewable technologies like solar is falling such fossil fuel subsidies make achieving grid parity for renewable technologies more difficult.21  

Greater public awareness and appreciation of the environmental issues may lead to a reduction of power consumption and waste, and greater uptake of roof-top solar schemes and other forms of distributed generation22.

Outlook

The UAE can learn from other jurisdictions leading in the renewables space but the framework for developing this sector must be tailored to the local market. For the shorter term, the existing IWPP benchmark may be the most optimal model to enable renewable generation on a large scale to progress and it is commendable that such advancements have been made to date, however, the mechanics and policies now needs to evolve to open up the market to other forms, and scales, of renewable generation.

Regional governments are looking at how to introduce a framework and a stronger infrastructure to support the development of renewable generation, with subsidies or incentives to encourage growth, technologies and investment. To further open up this market, the evolving legal and regulatory framework, and support mechanisms for renewables must be transparent, sufficiently holistic and robust to take advantage of the ever changing technologies.

The further promotion of regional and international investment, along with stable policy and regulation, dialogue with the private sector and consumer education will aid economic and energy resource diversification23. Arguably, it is these facets that will enable the UAE to develop and integrate renewables on a greater scale into its existing energy matrix.

[1] See www.adnoc.ae/content.aspx?newid=306&mid=306  for more information about energy and the UAE and ADNOC (Abu Dhabi National Oil Company).

[2] Abu Dhabi Plan 2030 (which can be found here www.upc.gov.ae) and Dubai Urban Development Framework Strategic Plan 2015 (DSP) (which can be found here) please see  www.dubai.ae/en.portal?topic,hm_dxbstgplan,0,&_nfpb=true&_pageLabel=misc)

[3] Abu Dhabi Plan 2030 (which can be found here www.upc.gov.ae) and Dubai Urban Development Framework Strategic Plan 2015 (DSP) (which can be found here) please see  www.dubai.ae/en.portal?topic,hm_dxbstgplan,0,&_nfpb=true&_pageLabel=misc)

[4] www.renewableenergyworld.com/rea/news/article/2011/01/abu-dhabi-rise-of-a-renewable-energy-titan

[5] See www.emirates247.com/business/economy-finance/dubai-plans-big-solar-plant-2011-09-26-1.420636  and finance.yahoo.com/news/Dubai-targets-5-percent-apf-491356278.html?x=0&.v=2

[6] Announced by the Dubai Supreme Council of Energy at the Dubai Global Energy Forum 2011, as part of the Dubai Integrated Energy Strategy for 2030 (http://www.albawaba.com/dubai-global-energy-forum-2011-showcases-dubai-integrated-energy-strategy-2030)

[7] Spurring the Growth of Renewable Energies in MENA through private Sector Investment, Preliminary Vision, Work in Progress, December 2010, MENA-OECD Business Council at p14. The paper also advocates the use of PPP schemes to promote investment, know-how, technology transfer and employment.

[8] http://www.utilities-me.com/article-1432-uae-renewable-investment-to-hit-100bn/

[9] Issues for financiers, Nicholas Sinden, Siobhan Smyth, HSBC Bank Plc and Risk Allocations in renewables projects, Tom Eldridge, Ike Nwafor, SNR Denton UK LLP in Part 3: Financing  and Structuring issues in Renewables: A Practical Handbook, Consulting Editors Matt Bonass and Michael Rudd, 2010.

[10] WorkingPaper: Investing in Renewable Energy in the MENA Region: Financier perspectives, Kirsty Hamilton, Chatham House, June 2011.

[11] Interestingly, at the time of writing this article it has been report by MEED (Issue 35,2-8 September 2011) that several of the prequalified bidders for the Noor 1 project in Abu Dhabi who have decided not to bid, cited a requirement that 50% of the solar panels to be used are those as yet untested Masdar-contracted solar panels, as influencing their decision not to bid; this may be an example of where greater dialogue between stakeholders could help overcome perceived risks.

[12] Other Regulated Activities include: desalination of water, storage of water, and transmission of water, (Article 71) Law No. (2) of 1998 concerning the Regulation of Water and Electricity Sector.

[13] For the licensing process see further www.rsb.gov.ae and different types of licences available see http://www.rsb.gov.ae/uploads/GuideToLicensing20100217.pdf . For example, Abu Dhabi Future Energy Company. (Masdar) was granted a self-supply licence to undertake solar embedded generation in respect of its 10MW solar power plant located at Masdar Development City.

[14] Pursuant to Article 79 of Law No 2 of 1998 and  The Electricity and Water (Licence Exemption) Order No.1 of 1999 (as modified).

[15] 'Economic Purchase' as defined in Law No. (2) of 1998  Concerning the Regulation of the Water and Electricity Sector, see  also Article 34 of Law No.(2) of 1998.

[16] There are also a number of industry forums and organizations to promote and facilitate discussions on renewable energy specifically see Emirates Solar Industry Association (ESIA) (www.emiratessolarcom).

[17] A Solar Rooftop Presentation for the Emirate of Abu Dhabi, Information Workshop, 10 February 2010, Abu Dhabi.

[18] Law No. 6 of 2011.

[19] Defined to include activities in connection with the power generation or water desalination (Law No 6 of 2011).

[20]   International Energy Agency - Key World Energy statistics 2010.

[21] Solar 'not competitive' in Gulf, The National Newspaper, April Lee, 5 September 2011.

[22] For further commentary see gulfnews.com/life-style/gadgets-technology/solar-so-good-in-the-uae-1.862137 for an example of residential solar technologies.

[23] For further analysis and discussion regarding investment policies of GCC countries see  Assessing Investment Policies of Member Countries of the Gulf Cooperation Council, Stocktaking Analysis, prepared by the MENA-OECD Investment Programme,  presented on 5 April 2011.


Guest commentary

The Solar Industry - strategies in an uncertain environment
Dr. Benedikt Ortmann/Geschäftsführer RENERCO Solar GmbH

Once again, talk of the imminent decline of the sector can be heard and read about everywhere.

Almost like clockwork, we regularly hear about so-called "Kurzarbeit" (shortened working hours subsidised by the German state), the closing down of factories and imminent and real cases of insolvency all over the world.

But is the situation different this time compared with the recent past? Are there differences compared with the various crises the sector has experienced over the past few years? In order to answer this question we must take a closer look at the symptoms of the crises and their origins.

Symptom No. 1: European and American producers suffering

After some years of abundant growth, the reduction in market demand constitutes a severe blow to producers throughout the world, causing many of them to lose momentum during a very sensitive phase of company development: large investments were made in new facilities which, contrary to expectations at the time, are now no longer running at full potential.

In addition, in many places, the consequences of fairly brutal international competition have taken effect. While, for the most part, European producers manufacture using equipment which is no longer state of the art and thus less cost efficient, it is predominantly Chinese producers who have the latest and most efficient production lines at their disposal thanks to the support they receive in the form of massive subsidy programmes.

In addition, the level of internal production has still not increased amongst many European producers. This is shown most clearly by the fact that some producers of modules are on the edge of bankruptcy, while silicium producers are still realizing EBIT margins of 40-60 % (sic!), which has been described by some of those active in the sector as simply obscene.

The differentiation within the sector into the different stages of the value added chain is certainly a normal phenomenon in developed sectors, but, in the current situation, it entails decisive competitive disadvantages vis-à-vis Chinese competitors, who are simply able to do better at a considerably higher integration level with the most up-to-date equipment and a considerable amount of capital.

In fact, during the past few years, many European producers have made a great effort to increase their level of real net output but their various excursions into thin layer chromatography and silicium factories have proved to be a disappointing failure. As if the situation wasn't bad enough, some European producers have now also incurred high levels of debt as a result of these adventures. Although, it must be said that these debts are in fact a result of bad business choices made over the past few years and not necessarily rooted in bad luck, as many would have us believe.

Symptom No. 2: Changes in the political framework conditions

It is plain to see: political will and several market mechanisms are currently moving in divergent directions. On a political level, large facility developments are increasingly being curbed, while it is precisely these large facilities which could help to stabilise the development of prices and quantities in connection with the sale of goods. Fuelled by the unpredictability of the price development within the sector itself, the frequency of statutory amendments regarding feed-in-tariffs has increased so much that the development of larger photovoltaic plants is in decline. How is it possible to start a project which requires a two year development phase prior to construction if there is no information as to whether the project will still be admissible under law at a future point in time?
 
Symptom No. 3: The impact of the financial crisis

One would actually think that the bursting of bubbles within the real estate sector and a decline in the volume of loan transactions effected by banks might be favourable developments where the solar sector is concerned. However, political uncertainty and the increase in risk margins have in fact had an adverse effect upon the financing environment for photovoltaic projects.

Symptom No. 4: Speculation on the rise everywhere

In markets in which all of the following factors are present: swift decline in prices, miscalculated allocation of goods, feed-in tariffs which are too high and too short lived and larger quantities of involved capital – the presence of a high degree of speculation is only natural and sometimes even inevitable. This already starts with the private customer considering the option of finally having a PV plant installed on the roof of his house: if the prices for the systems continue to drop faster than the feed-in tariffs, it can prove favourable to continue to postpone the investment for some time.

Certainly, such behaviour is based on rational thinking but it is nevertheless also based on speculation, and nobody could have predicted this development at the beginning of the year. And these kinds of considerations inevitably show themselves further down the line in the upstream stages of the added value chain: those who had high levels of stock of modules, cells and wafers at the beginning of the year found themselves compelled to significantly adjust values downwards during the course of the year. In contrast, anyone who had speculated on the spot market was in a fortunate position this time.

As somebody who has been familiar with this sector for many years now, I can identify some old patterns here. Feed-in tariffs have always been subject to change and every time the same question has arisen: "How can we survive it?" This is why there has always been speculation. This may apply today even more than it has previously but, in principle, nothing has changed in this regard.

What has changed, however, is the speed and the scale with which changes are impacting upon key parameters within the sector. This leads to a very limited ability to forecast market developments.

The response to the question "what will the market look like in 2012?" can only consist in speculation at the moment. Market players can only react at the last minute. Even projecting various scenarios for the development of the market in 2012 is of little use, as the ramifications of these scenarios can be so different that the only logical conclusion to be drawn is that it would be preferable to avoid taking any action at all for the time being.

And precisely this behaviour can be seen in the case of many market participants: licking their wounds, ensuring their own survival, waiting to see what will happen next and being prepared for everything – these seem to be the slogans of the hour. This pattern of behaviour too, however, is well-known from recent years. This has been a favourable approach for many participants in the recent past and it may well prove to be the right path to pursue at this time too.

After the German Post-Fukushima Energy Turnaround - Facing New Legal, Engineering and Commercial Challenges
Dr. Matthias Lang, Partner, Bird & Bird Düsseldorf
 
The German 180° nuclear energy turnaround after the Fukushima nuclear accident has passed the legislative hurdles. Trying to turn a ship as big as this energy supertanker is not an easy task. And the new course is not without risk, as it leads into partly uncharted territories. To put it positively, many legal, engineering and commercial tasks still lay ahead of us.

1. The Legal Turnaround

It seems a long time ago that the government decided to extend the operating times of the German nuclear power plants in autumn last year. A key reason was to create a sound bridge to more renewable energy. It led to an extension of the operating times of the 17 German nuclear power plants for an average of 12 years. The nuclear power programme was meant to assist in achieving Germany's CO2 reduction programme. It was to provide new funds to pay for more renewable energy. Additional profits from the energy companies were to be tapped to alleviate federal budget problems. But after Fukushima and the German government's turnaround decision, this is all history now.

In unprecedented speed, the federal government put together an energy turnaround package and got most of it through the legislative process. Less than four months after the earthquake in Fukushima on 11 March 2011, the Bundesrat (Federal Council) followed the Bundestag's (Federal Parliament's) vote of 1 July 2011. Correspondingly the Bundesrat approved the energy legislative package for the most part in its last session before the summer break on 8 July 2011. The package consisted of seven laws:

  1. 13th amendment of the Atomic Energy Act (AtG) – the actual nuclear energy exit law;
  2. Act Amending the Legal Framework for the Promotion of the Electricity Generation from Renewable Energy Sources (Gesetz zur Neuregelung des Rechtsrahmens für die Förderung der Stromerzeugung aus Erneuerbaren Energien), which most importantly contains amendments of the Renewable Energy Sources Act (EEG) ;
  3. Act Amending Energy Law related Provisions (Gesetz zur Neuregelung energiewirtschaftsrechtlicher Vorschriften), which most importantly contains amendments of the German Energy Act (EnWG);
  4. Act on Measures Accelerating the Expansion of the Electricity Grids (Gesetz über Maßnahmen zur Beschleunigung des Netzausbaus Elektrizitätsnetze), which most importantly includes a new Grid Expansion Acceleration Act (NABEG), but also amends other laws;
  5. Act Amending the Energy and Climate Fund Act (Gesetz zur Änderung des Gesetzes zur Errichtung eines Sondervermögens "Energie- und Klimafonds" – EKFG -ÄndG);
  6. Act Strenghtening Climate-Friendly Measures in Towns and Municipalities (Gesetz zur Stärkung der klimagerechten Entwicklung in den Städten und Gemeinden); and the
  7. First Act Amending Shipping Laws (Erstes Gesetz zur Änderung schifffahrtsrechtlicher Vorschriften), containing in particular offshore wind provisions.

Approval by the Bundesrat, the legislative body that represents the federal states, had been uncertain for many of the bills contained in the package. The CDU/CSU/FDP coalition government does not hold a majority in the Bundesrat. While support for the amendment of the Atomic Energy Act (AtG) in the Bundesrat could be expected after the clear majority that the exit bill received in the Bundestag's vote, this was not the case for many of the other bills.

To be able to decide on the legislative package before the summer break, the Bundesrat had shortened the consultation period for the bills. Still the expert committees of the Bundesrat prepared numerous recommendations to amend the bills. While they endorsed the nuclear phase-out, they recommended that the Bundesrat invoke the Mediation Committee for five of the eight bills of the energy package.

The only bill the Bundesrat eventually did not approve of was the Act on Fiscal Measures Promoting Energy-Efficient Renovations of Residential Buildings (Gesetz zur steuerlichen Förderung von energetischen Sanierungsmaßnahmen an Wohngebäuden), which aims at promoting the energy-efficient renovation of buildings older than 1995 by giving tax incentives. The incentives shall encourage energy-savings in the building sector that accounts for 40% of the German energy consumption. The federal states opposed the bill for fear of tax losses, which they want to be compensated for by the Federation. Pursuant to the draft bill, tax losses of states and municipalities can amount to roughly EUR 900 million for a period of twelve months. Higher figures are feared by some. On 26 October the federal government exercised its constitutional right to invoke a mediation procedure. But by 22 November a mutually agreeable compromise has not been found by the Mediation Committee.

By 5 August 2011 - less than five months after the Fukushima disaster - all laws from the energy turnaround package had been promulgated and were therefore ready to enter into force.

2. Legal Challenges

Various parts of the energy turnaround are currently before the courts.

a) Nuclear Power Extension

Already last year's nuclear extension had produced work for the courts. The constitutionality of the decision to extend the operating times had been challenged by different groups. These cases have not yet been decided, and it remains to be seen to what extent the decisions will affect the post-Fukushima exit situation.

b) Moratorium Shutdown orders

The federal government's impromptu three month moratorium on 14 March 2011 and the decision not to execute the previously decided nuclear power extension laws led to further legal challenges. Strictly legally speaking, the chancellor or the federal government cannot enact a moratorium on laws that have been passed by parliament to extend the operating times of the German nuclear power plants. Regardless, the government also announced it would shut down the seven oldest operational German nuclear power plants that were built prior to 1980 during the time of the moratorium. Only one of the operators dared to challenge the legality of the immediate shutdown orders, but the case is still pending.

c) Fuel Rod Tax

The nuclear fuel rod tax was introduced last year as a consumption tax on newly installed plutonium and uranium fuel rods in the course of the 2010 nuclear power extension, to siphon off additional profits from the nuclear power extension. Despite the reversal of the extension decision, the Nuclear Fuel Rod Tax Act that was aimed at raising EUR 2.3 billion per year between 2011 and 2016 was not repealed.

Not surprisingly, the legality of the fuel rod tax was challenged after the nuclear energy turnaround. The Fiscal Courts of Hamburg and Munich recently said they had serious doubts about the constitutionality of the nuclear fuel rod tax. The courts argued it was likely that the German state did not have the competence to raise the tax as the tax was most likely not a consumption tax in the sense the German federation can levy under constitutional law. Furthermore, the courts called it doubtful whether the constitutional system of balanced financial competences between the German federation and the federal states allowed the German federation to invent such a new tax.

The courts granted leave to appeal to the Federal Fiscal Court (Bundesfinanzhof), as they considered the matter of fundamental importance. Hence, the decision is most probably only a first victory for the operators of nuclear power plants, albeit an important one. E.ON, RWE and EnBW all declared to have taken legal action against the nuclear fuel rod tax.

d) Legislative Updates

The energy turnaround package was pushed through the legislative process at unprecedented speed. This inevitably produced room for improvement in the various statutes, and not all revisions could be considered as carefully as otherwise. Already during the legislative process, the government indicated its willingness to enact changes later in the year. It looks like we will therefore soon see some further energy law changes that will hopefully address some of the package's open issues.  

3. Engineering Challenges

a) Decommissioning of 8.4 GW and Nuclear Back-up Plant

The energy package led to the immediate decommissioning of eight nuclear power plants with a capacity of 8.4 GW. As the effect of reducing generation capacity by such an amount is difficult to predict, the revised AtG gave the Federal Network Agency (BNetzA) the right to designate one of the eight nuclear power plants as a back-up power plant until 1 September 2011.  However, BNetzA decided not to nominate such a back-up plant. Even considering exceptional contingencies, the transmission network could be run without a nuclear back-up power plant, BNetzA said. This was possible as additional conventional power plant capacities could be identified that are able to act as back-up power plants. 

In total BNetzA identified back-up power of 1.009 MW in Germany and back-up capacity of 1.075 MW in Austria. However, BNetzA also made it clear that all the feed-in and load scenarios that have been examined required interventions, often of a significant kind, by the transmission system operators concerning the operation of the power plants connected to their grids. Even with back-up power there remained a certain residual risk for the security of supply.

BNetzA also suggested granting E.ON's older coal-fired power plant units 1 to 3 in Datteln, North Rhine-Westphalia, the right to continue operating until the new power plant unit 4 has been erected (due to a lawsuit the date of completion is currently unclear). Furthermore BNetzA suggested in view of the expected tight supply/demand situation in winter 2012/2013 to examine whether other coal-fired plants could operate as a back-up power plant after official decommissioning.

b) Renewable Electricity Supply and Grid Expansion

Reduced nuclear capacity on the one hand and more renewable power on the other hand leads to an even more urgent need for grid expansion.

According to estimates by the Federal Association of the Energy and Water Industry (BDEW), renewable electricity supply in Germany exceeded 20% for the first time in the first six month of 2011.

With a share of 7.5% wind power remains the most important renewable energy source in Germany, followed by biomass, which accounts for 5.6% (2010: 5.4%). Due to strong growth and the sunny spring months, photovoltaic (PV) power was able to almost double its share from 2.0% to 3.5%, overtaking hydro power and coming in third. The strong contribution of PV power reflects the tremendous capacity increase of 2010. The results fit in well with the government's aim of reaching a 35% renewable energy share by 2020, as recently laid down in Section 1 para. 2 of the amended 2012 Renewable Energy Sources Act.

The substantial changes on the generation side are not yet mirrored by a corresponding upgrade of the grid. Many plan determination procedures for power line projects pursuant to the Energy Line Extension Act (Energieleitungsausbaugesetz - EnLAG) need to be completed swiftly to enhance the grid.  
 
4. Commercial Challenges

The commercial costs and benefits of the energy turnaround are very much under discussion.

VIK, the association that represents the interests of industrial and commercial energy consumers, recently predicted that electricity costs for its members will rise by 9% on average in 2012. The German Council of Economic Experts (Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung), an academic body advising German policy makers in questions of economy, criticised the costly promotion policy for renewable energy and calls for a European approach for the expansion of the share of renewable energy.

While agreement exists on the need to expand grids, certain cost elements are very much under discussion. The Federal Network Agency (BNetzA) recently carried out a consultation for return on equity rates for the second regulation period starting 2013/2014. BNetzA proposed to lower the rate before corporate tax from 9.29% to 8.2% for new installations. Not surprisingly, the proposal faced opposition from industry groups, arguing that the reduction endangers the necessary expansion of the grids. It would deter investments in Germany, driving investors abroad, where investment conditions were much more favourable. After consulting with market participants, BNetzA decided on a return of equity rate of 9.05% for new installations. This lowered rate will start in 2013 for gas networks respectively in 2014 for electricity networks. Regulatory authorities in France, Austria, Portugal and Italy were reported to grant investment premiums and the US rate almost reached 12%.

The government decided to have the turnaround in German energy policy monitored regularly. Results shall help to assess whether the implementation of the various amended laws contributes to the goal of the energy turnaround to achieve an environment-friendly, reliable and affordable energy supply.

The Federal Ministry of Economics and Technology (BMWi) and the Federal Ministry for the Environment, Nature Protection and Nuclear Safety (BMU) will jointly carry out the monitoring, with BMWi focusing on grid expansion, the construction of new power plants, replacement investments and energy efficiency and BMU monitoring renewable energies. The monitoring process will be organised by a new administrative office at BNetzA, with an independent higher federal authority under the supervision of BMWi. The monitoring process will be accompanied by an expert commission.
 
In any event, companies need to monitor more closely than ever how the latest energy law changes may influence them commercially. At the same time, many changes also provide opportunities to mitigate adverse effects. Uncharted territories also provide opportunities.


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