New German law puts people power to the test

GERMANY: Germany's impressive record of wind-power growth has largely been driven by local cooperatives rather than international utilities. But new legislation threatens the future for this hitherto successful ownership model.

Community projects… Germany’s wind power growth has been driven by local investment (pic: BWE/Thorsten Paulsen)
Community projects… Germany’s wind power growth has been driven by local investment (pic: BWE/Thorsten Paulsen)

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Community ownership of wind farms and energy cooperatives have played a substantial role in building Germany's onshore wind fleet to its present level of roughly 34GW, making it comfortably the largest onshore market in Europe, and the third largest in the world behind only China and the US.

The investment framework has been favourable and enthusiasm for wind power strong. But Germany's 2014 Renewable Energy Act's requirement for obligatory direct marketing of electricity in wholesale markets, together with auctioning, an amended financial regulation, and a controversial new planning restriction all raise new hurdles for local cooperatives.

People's investment in wind energy amounted to around 15.5GW of the 30.8GW that Germany had installed by the end of 2012, according to a study on the market reality of people's wind farms by Leuphana University Luneburg and environment engineer Uwe Nestle, released in April 2014.

More than 14GW is owned by enterprises in which citizens have stakes and voting rights, the study found. These include energy cooperatives and limited liability companies, with a structure that allowed many individuals, often from the local region, to co-invest but be liable for only up to the amount they placed in the project. Around 1.3GW of the capacity is owned by individuals, often farmers. By contrast, energy companies account for merely 3.2GW of Germany's installed capacity, with institutional and strategic investors accounting for 12.2GW.

Permitting benefits

The success of community wind power investment is down to factors that include low interest loans through Germany's KfW development bank, and clear planning rules. Since 1997, Germany's federal building code has granted onshore wind turbines the same privileged status as other kinds of power stations in non-urban areas but, to prevent haphazard developments, gave planning authorities the right to specify priority areas for wind turbine installation; once the priority areas are fixed, in a process that can take around four years, the locations are in most cases immune to appeal.

Another important step was a change in trade tax introduced in 2009. Trade tax is an important source of income for German municipalities, being paid by businesses located within their boundaries. Before the change, trade tax on wind farm revenue was paid entirely to the municipality in which the operator was based, which could be at the other end of the country, while the municipality in which the wind project was installed received nothing. The 2009 amendment has ensured that the parishes containing wind farms received at least 70% of the trade tax levied on the projects' revenues, while the parish where the operator was based took 30% at most. The amendment has improved local acceptance of wind farms as all local citizens - not just those able to invest - now benefit from the parish's extra income.

Evidently, German citizens investing in wind energy are not motivated by an interest in high returns. Dividends averaged only 2.5% per year in the 2002-2011 period, according to the Leuphana University research on the financial reports of 127 wind farms.

The low rewards were mainly a consequence of lower than expected winds due to poor wind forecasting. On average, only 86% of the returns predicted in the project prospectuses were achieved. "The high satisfaction still found among the investors is attributed to citizens' interest in playing a role in the projects in the local or regional area," the study said.

But Germany's planned switch to a tendering system from 2017, as set out in the Renewable Energy Act 2014, could bode badly for Burgerwindparks. With already only modest returns, the people's projects will have difficulty in shouldering the extra risks created, the study argued. Uncertainty as to whether a project will be successful in a tender may dissuade local individuals from investing in the proposed project. This, in turn, could reduce local acceptance for the project, the report warned.

"For large institutional investors, a project that fails in one auction is generally accounted for financially as part of a portfolio of projects, and can be compensated for by other projects that are successful in other tenders," says Jurgen Punke of Take, Maracke & Partner, a Kiel-based legal practice.

"It is a different matter for citizens' wind farms. They are restricted to a certain region, usually have no alternative projects, and have to calculate-in potential failure at the auction when gathering funds for the investment. This will reduce acceptance for people's participation making it difficult to even set up future citizens' wind farms, because the capital required for initial planning may be lost without any possibility of securing compensation elsewhere," he says.

Will small players survive?

It is not clear whether efforts to keep small players involved in wind energy after the switch to a tendering system will be successful, but if they stay in the game, their role may be to keep onshore wind energy as cheap as possible. Energy projects developed by small players may not necessarily be more expensive than projects developed by bigger operators, because the players have differing expectations of return on investment, according to a joint study by ZSW, Takon, Ecofys and BBG and Partner. The study was for the federal economy ministry on the structure of a pilot tendering system for a ground-mounted photovoltaic (PV) plant.

Exactly how a tendering procedure to fix the support rate for onshore wind will be structured is also still vague. The European environmental protection and energy aid guidelines 2014-2020 (EEAG) allow the options of exempting wind turbines of up to 6MW each, or six generation units from the auctioning process. As German wind farms are usually less than 20MW, Burgerwindparks could benefit. However, when the Renewable Energy Act 2014 took effect on 1 August, there was no indication that the German government intended to allow such an exemption.

Some in the industry hope that experience with the pilot tendering for PV plants from next year could trigger a change of heart. Already, the federal economy ministry's study on these auctioning plans has expressed concern about disadvantaging small players such as energy cooperatives. Qualifying conditions to participate, and penalties for delays or non-implementation for renewable projects are needed to ensure projects are built, but these can increase the bidding risk and create entry barriers resulting in higher financing costs and negative effects on the bidders' structure, conceded the ministry in its report.

Direct marketing

EEAG 2014's new obligatory requirement that wind farms commissioned after 1 August 2014 must sell their electricity into the wholesale markets, in itself, not new. More than 30 companies, including turbine maker Enercon, offer the service to wind project operators. Around 30GW of onshore wind capacity voluntarily uses this mechanism. But the law says that if the spot price on the European Power Exchange (which trades power between Germany, France, Austria and Switzerland) is negative for more than six consecutive hours, support for renewables fall to zero for all the hours during which prices were consistently negative.

Long periods of negative pricing remain rare but, according to consultancy Energy Brainpool, the measure means that marketing will become riskier and, as a result, raising finance for new projects will become more difficult.

An amendment to capital investment law, the Kapitalanlagegesetzbuch, is another test for energy cooperatives. "This is supposed to protect investors, but the upshot is they are made so uncertain that hardly anyone will dare to invest any more," warned Verena Ruppert, board member of the association for people's energy, Bundnis Burgerenergie, in July. The amendment set 21 July as the deadline for energy cooperatives that invest in wind, and other renewable projects initiated by other parties such as municipalities or energy companies, to register with the financial regulator BaFIn to continue operating.

The criteria for registration are difficult for cooperatives, which are often run as voluntary organisations, to fulfil. The investment participation structures that have been commonly used in the past will no longer be possible, warned the association.

The effects are already being seen. About a third of all energy cooperatives are not planning any investment in 2014, compared with only 8% in 2013, according to the German cooperative organisation, Deutschen Genossenschafts-und Raiffeisenverbands (DGRV). "Although the government's policy document following national elections in September 2013 promised to promote people's participation, the activities of energy cooperatives are now significantly reduced," said DGRV chairman Eckhard Ott, in July.

Since 2006 around 718 energy cooperatives have been set up in Germany, 129 in 2013 alone, with PV development proving more popular than wind. "But in the first three months of 2014, only 17 were founded," said the DGRV.

There are now around 37 energy cooperatives investing only in wind in Germany compared with around 400 with pure solar investment, according to an energy cooperative database analysis.

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