Moody Releases Report on German Draft Law on Offshore Wind Farm Connections

Although the liability-sharing mechanism introduced by Germany’s draft law, dated 29 August 2012 and reviewed by the German parliament in October 2012, improves planning visibility and allows affected transmission system operators (TSOs) to pass on the costs for delays in network connections to end consumers, some uncertainties remain regarding the application of the law, says Moody’s Investors Service in a Special Comment published today.

Moody’s says that the draft law is credit positive because it will ensure that investors will continue to fund the offshore developments necessary to achieve the goals of the German energy policy by providing investors with the ability to earn a return on their investment even if the network connection may be delayed. The rating agency also notes that the new law will allow the TSOs to invest with significantly less risk, as it provides a framework for passing the costs of connection delays through to end consumers, and limits the TSOs’ liabilities in those cases where delays result from negligence.

Moreover, the requirement for TSOs to provide an annual offshore network development plan that details investments on a 10-year forward-looking basis will create planning security for the relevant companies and allow them to schedule their capex requirements accordingly, rather than reacting purely on the timetable of the wind farms, as is currently the case.

However, Moody’s says that TSOs may require significant additional liquidity reserves in order to address the potential time-lag in passing potential costs on to customers. An annual cap on the amount that can be passed through to the end consumer will limit the amount that a TSO can recover during a calendar year. The draft law does not specify how unrecovered amounts that are carried forward may be passed on in future years, if new cost claims occur. This adds to existing liquidity pressures created by the legal requirement to purchase electricity produced from renewable sources and market them on the German power exchange.

With the existing requirements related to renewable energy generation already causing concern in terms of affordability, it is questionable how much more end customers will be willing to pay and politicians will be willing to put to them, particularly considering a national election due in autumn 2013.

The report also notes that, although the draft law stipulates that TSOs can share the cost of delays caused by negligence, it remains unclear what constitutes negligent behaviour and who will be responsible for assessing it as such.

Lastly, Moody’s says that due to the technical complexity related to long distance offshore connections, particularly in the North Sea environment, and limited availability of experienced suppliers, the industry sees the risk of potentially significant delays.

[mappress]

Press release, November 06, 2012; Image: alpha-ventus