On Tuesday 13 October 2015, Parliament adopted the STROOM Bill. The Bill aims to create a new, clear and simple framework for the Dutch electricity and gas market and to facilitate the energy transition to renewable energy.
With the adoption by Parliament, the legislative process is on schedule and, if discussions in the Senate go smoothly, the Bill may enter into effect on 1 January 2016. In view of the upcoming offshore wind energy tenders, the fact that the STROOM Bill constitutes the legal basis for the development of an offshore grid and the appointment of TenneT as transmission system operator ("TSO") for the offshore grid, it is essential that the Bill enters into force on schedule.
This fifth publication in a series on the STROOM Bill, addresses the key elements of the regime applicable to the offshore grid as set out in the Bill and its implementation decree.
Offshore grid tariff regulations
The development of an offshore grid aims to accommodate an increase in offshore wind energy capacity of 3,450 MW, resulting in a total capacity of 4,450 MW by 2023. The offshore grid is expected to yield a 40% cost reduction for the connection of the new offshore wind parks and a 10% overall cost saving for offshore wind energy due to a reduction in investment costs, financing charges and maintenance costs, as well as cost savings for the wind parks due to the higher availability of connection to the offshore grid.
TenneT will be compensated for its costs of the offshore grid through the regulated transmission tariffs. In order to avoid a substantial increase in transmission tariffs, the STROOM Bill provides for a direct subsidy to TenneT as compensation for the incurred development costs. This subsidy will be submitted to the European Commission for approval under state aid regulations.
The investment cost for the offshore grid will be set out by TenneT in a biennial investment plan that will elaborate on the framework for the development of offshore wind energy drawn up by the Minister of Economic Affairs (the “Scenario”) pursuant to the STROOM Bill. This Scenario aims to enable the Dutch State to manage the development of offshore wind until 2023. To this end the Scenario shall provide important technical requirements and prerequisites for the offshore grid and the offshore wind parks (such as the order in which the wind sites must be developed, the maximum capacity per site, the voltage level and the maximum subsidy).
Generally, grid investments are pre-financed by the system operators; only after the investments are brought into operation will the system operators receive compensation for the investment costs through the transmission tariffs. Under the STROOM Bill this will however change for large infrastructure investments, including the offshore grid. For these large projects, the STROOM Bill will allow costs of working capital to be included in the transmission tariffs in the same year the costs are incurred.
Liability for delayed completion and transmission interruptions
Since the offshore grid potentially poses substantive risks and liabilities, which may endanger the development of offshore wind energy, the STROOM Bill and its implementation decree (the STROOM Decree) aim to offer a clear liability regime for TenneT as TSO of the offshore grid. This liability regime addresses compensation for postponed revenues and consequential damages (including, inter alia, costs of mitigation measures, costs of hiring additional equipment, staffing, however excluding financing costs, which are deemed to be included in the postponed revenues) and distinguishes between damages incurred due to a delay in the construction of the offshore grid and damages due to transmission interruptions.
Delay in construction
A delay in the construction of the offshore grid is deemed to occur when the completion of the connection of the park and the system between the park and the onshore transformer station exceeds the completion date set out in the Scenario. This regards the availability of the minimum transmission capacity of the offshore grid as set out in the Scenario. Any additional capacity will not be guaranteed and a delay in the availability of such additional capacity will not be compensated.
To qualify for damages in the event of a delay in the construction of the offshore grid, the foundation of the wind park must be in place and the wind park operator is required to demonstrate that the wind park would have been ready to start operations, had it not taken measures to mitigate damages. A delay in the construction of (part of) the offshore wind park shall therefore affect the compensation payable by TenneT.
In case of a delay in completion of the offshore grid, the postponed revenues will be calculated based on the assumption that any missed subsidy revenues due to the delayed completion will be received at the end of the subsidy period and any missed electricity sales will be realized at the end of the lifetime of the park. On the basis of a discount rate of 7%, the postponed revenues are calculated as follows:
[(SDE+ Subsidy Amount – SDE+ Subsidy Amount/2.95) + (SDE+ annual electricity price pursuant to the SDE Decree – SDE+ annual electricity price pursuant to the SDE Decree /3.87)] x electricity that could not be transported.
The SDE+ Subsidy Amount is the base amount per kwh for which SDE+ subsidy has been granted pursuant to the SDE Decree minus the SDE+ electricity price applicable for that year pursuant to the SDE Decree.
The electricity that would have been generated by the wind park and transported through the offshore grid had the delay not occurred, is determined on the basis of the wind speed, and the electricity production profile of the wind park, taking into account any interruptions in the production of electricity by the wind park due to delays, disruptions or maintenance, as well as any electricity that was transported through the grid. For this purpose, a computation model will be set out in a ministerial order. In this calculation, missed electricity over a period of five days per year shall not be taken into account, since this period is deemed necessary for scheduled maintenance of the grid. By disregarding this period, wind park operators are encouraged to schedule their own maintenance as much as possible within the same period. The resulting damages will be increased with legal interest accruing from the occurrence of the damages.
At the date of publication of this newsflash the aforementioned ministerial order has not yet been published.
Interruption of transmission
In case of an interruption of transmission of electricity, the postponed revenues are calculated based on the assumption that any missed subsidy revenues due to the transmission interruption can be made-up by production in later years. Based on the assumption that missed electricity production will be made up within five years and a discount rate of 7%, the postponed revenues are calculated as follows:
[(SDE+ Subsidy Amount – SDE+ Subsidy Amount/1.4) + SDE+ annual electricity price pursuant to the SDE Decree] x electricity that could not be transported].
For the definition of SDE+ Subsidy Amount reference is made to the aforementioned formula.
Missed electricity over a period of five days per year shall not be taken into account in the determination of postponed electricity sales and postponed subsidy revenues.
In order to qualify for compensation from TenneT, the damage calculations will have to be verified by an independent accountant. Since TenneT is deemed to have only limited influence on the cause of the damages, it will be compensated for damages paid to wind park operators through the transmission tariffs. This will however not apply in the event of gross negligence by TenneT, in which case an amount of EUR 10 million per year will be for TenneT's own risk and account (being identical to the deductible franchise applicable in Germany).
Time is of the essence
As a clear compensation scheme is critically important to obtaining investor confidence, it is crucial that the STROOM Bill (or, in any event, the elements of this Bill that relate to the offshore grid) enter into force no later than 1 January 2016 and that the manner in which the missed electricity will be determined is promptly clarified. In the worst-case scenario, these elements may have to be lifted out of the STROOM Bill to ensure a timely entry into force.
The above is intended to provide an overview of important recent developments in relation to the STROOM Bill and the development of offshore wind in the Netherlands. It is not intended to be a complete enumeration of all relevant legislation. If you have any questions or remarks regarding this article or would like to receive our previous articles on this topic, please do not hesitate to contact us.