Windy times for offshore wind power support

1. Existing legal framework

The current Belgian support regime for offshore wind farms is based on three pillars: (i) offshore green power certificates (hereafter "offshore GPC") are awarded to installations that generate electricity in the waters over which Belgium has jurisdiction. These offshore GPC can be sold to the TSO at a fixed minimum price of 107 €/MWh for electricity generation from the first 216 MW installed and 90 €/MWh for additional installed capacity; (ii) the TSO must finance one-third of the cost of the submarine cable, with a maximum of €25 million; and (iii) there is a specific regime for production deviations that apply to offshore wind power (i.e. limited imbalance penalties).

The federal legislator has furthermore delegated to the King (i.e. a minister with countersignature of the king) the competence to create a mechanism of guarantees of origin for offshore electricity generation and/or to create a mechanism to finance all or part of the net burdens that arise from the mechanism of offshore GPCs (and offshore guarantees of origin). The latter may include a surcharge on the transmission tariffs (hereafter the "offshore surcharge").

Two recent evolutions have taken place which resulted / might result in a (future) reform of the support regime for offshore wind power. Firstly, the CREG has published a study dated 26 June 2013 regarding the reform of the support regime for offshore wind power, evaluating also the Memorandum Dralans in this study. Secondly, the federal legislator has amended the Electricity Act whereby a progressive reduction of and a cap for the offshore surcharge have been laid down, among other things.

2. Memorandum Dralans and CREG Study regarding the reform of the offshore wind support regime

The just level of the support regime for offshore wind power has been a point of discussion for years in Belgium. To end the discussion, Mr Dralans, per the instructions of the Belgian Federation for Entrepreneurs ("VBO/FEB"), conducted a study which aimed to suggest an alternative support mechanism for offshore wind power. The results of this study, known as the Memorandum Dralans, were presented in March 2012.

The Memorandum's goal is to reveal findings on how the support regime could be made more cost efficient. The Memorandum suggests that the starting point should be the establishment of a link between the electricity price and the support regime. Two alternative support regimes are developed to establish this link: one is the adjusted LCOE1 system, the other the classic LCOE system. The former would apply to the domain concessions of Norther and Rentel, and the latter to the domain concessions of Mermaid and Seastar. C-Power, Belwind, and Northwind would continue to enjoy the existing support regime because they have already started the exploitation or construction of their offshore wind parks.

Under the adjusted LCOE system, the LCOE starting point is 160 €/MWh for the first 216 installed MW and 143 €/MWh for additional installed capacity. There is also a yearly indexation. Under the classic LCOE system, the LCOE for offshore wind energy would be calculated every two years based on the costs of a technological reference framework, capital remunerations, and the expected electricity generation. This LCOE would be used as the base for all investments whose financial close will happen within the next two years.

In the first part of its June 2013 study (mentioned above), the CREG evaluated the Memorandum Dralans. The CREG favoured principally the link of the support regime for offshore wind power with the electricity prices, but it warned that there would be some side effects to this flexible type of support. The CREG also welcomed the proposal to abolish the current system for production deviations that apply to offshore wind power and to replace it with a general system of production deviations ("the general balancing mechanism"). However, the CREG formulated some remarks too. Its first remark was that the Memorandum Dralans was partially out-dated because the market conditions had changed. The CREG also noted that the Memorandum lacked clarity on some issues, such as: (a) Would the classic LCOE be calculated per wind park or would it be standardized? (b) Is there a wind guarantee (full load hours) or a volume guarantee (MWh) under the classic LCOE system? (c) Which return on equity and which leverage are used under the classic LCOE system? and (d) How would the shut down on Elia's demand work? Furthermore, the CREG disliked the proposal of a wind or a volume guarantee because it would not help the bankability of the project. It also opposed the proposal for an indexation under the adjusted LCOE system because it would overcompensate the concession holders. Finally, the CREG made some remarks on the calculated impact of the "Plug at Sea" (also "Belgian Offshore Grid" or "BOG") and of the state guarantee on the LCOE.

In the second part of its June 2013 study, the CREG assessed the thesis of the State Secretary for Energy that a reform of the support regime for offshore wind power would lead to a significant saving of €800 million a year compared to the baseline scenario. The CREG concluded that due to the Plug at Sea, there is a risk that there will be rather a shift in the costs than a significant saving. It estimated that a significant saving in the short term is not possible. Furthermore, the CREG warned that a reform of the support regime may not destabilize or render less favourably the investment climate.

In a final part of its June 2013 study, the CREG proposed itself a reform of the support regime for offshore wind power, taking into account future evolutions such as the Belgian Offshore Grid. The CREG proposed an LCOE of 145.70 €/MWh for the first 216 installed MW and an LCOE of 128.70 €/MWh for additional installed capacity. This LCOE would apply to the last four offshore domain concessions. The support per MWh would be determined monthly as the difference between this LCOE and the electricity reference price, being the PPA2 contractual price.

3. Progressive reduction ("degressivity") and cap of the offshore surcharge

Art. 7, §1 of the Belgian Electricity Act gives the King the possibility to create a mechanism to finance all or part of the net burdens that arise from the mechanism of offshore GPCs (and offshore guarantees of origin), after consulting with the (Belgian) Council of Ministers and on the proposal of the CREG. This mechanism may include an offshore surcharge.

In the Programme Act of 28 June 20133, the federal legislator amended Art. 7, §1 of the Electricity Act, setting out further details and certain conditions which must be observed when imposing such offshore surcharge.

The offshore surcharge will henceforth be due by all final consumers on each kWh they take off the grid for their own consumption. The taxable base of the offshore surcharge will hence equate with the taxable base of the federal contribution on electricity. VAT remains applicable to the offshore surcharge.

For electricity consumptions from 1 July 2013 until 31 December 2013, a progressive reduction ("degressivity") of the offshore surcharge is introduced to mitigate the impact of the offshore surcharge on the competitiveness of large consumers. The offshore surcharge is furthermore capped at €125,000 per consumption location.

This reduction and cap apply to all final consumers except those who could have concluded a branch agreement or a covenant, but have failed to do so, or those who have not respected the conditions set out in this branch agreement or covenant. Companies who would have enjoyed a reduction because of a branch agreement or covenant, of which they did not respect the conditions, will have to reimburse the CREG and will lose the reduction for the next year.

Elia will be responsible for the collection of the offshore surcharge by invoicing it to the holders of an access contract or the DSOs. The latter may pass on the offshore surcharge to their own customers. The CREG has an obligation to compensate the suppliers for the total sum of the reductions. In practice, the suppliers are thus used as "buffers": they have to pay the full amount to Elia, but have to grant immediately the reduction to the final consumers, then to reclaim it from the CREG.

The reductions will be compensated with the money received from certain excises, and, if those sums were to be insufficient, with a part of the revenues from the company tax.

The CREG must report each trimester to the Chamber of Representatives and the Ministers for Energy, Budget and Finance on the payments that it has made.

In its advice, the Council of State indicated among other things that the Programme Act requires a consultation by the federal government of the Regional governments, and that the Programme Act must be notified to the European Commission for an assessment of its conformity with the state aid rules. It is unclear whether these measures have been taken.

Finally, it should be noted that the newspaper De Tijd announced on 3 July 2012 that the State Secretary for Energy intends to propose to the (Belgian) Council of Ministers to use part of the tax on the nuclear rent and part of the revenues from the opened access to the production capacity of the nuclear power plant Tihange I to finance the offshore wind parks and hence to lower the offshore surcharge for all final consumers.

1. Levelised cost of energy.

2. Power Purchase Agreement.

3. Belgian Official Gazette 1 July 2013.