Germany’s experience in transition to renewable energy auction

The webinar series “International Experiences in Renewable Rnergy Auction” (IEREA2021), hosted by PECC3 with support from the Center for Procurement Support (CPS), the Public Procurement Agency of the Ministry of Planning and Investment, continued its successful run with the 4th session on August 20th, 2021 at 3 p.m. With the theme “Sharing is caring,” the session addressed Germany’s experience in transitioning from FiT to renewable energy auctions and applicability for Vietnam.

Mr. Tran Quoc Dien – Deputy General Director of PECC3 – delivered an welcoming speech on behalf of the organizers. He expressed gratitude to the German Embassy and German experts, as well as the representatives from ministries, agencies, associations and Vietnamese businesses, for their participation. Since 2009, the Government of Germany funded research on wind energy in Vietnam through the initiative “Support to the Up-Scaling of wind power”. GIZ assisted the Government of Vietnam in establishing FiT 1 and FiT 2 schemes for wind energy projects. The transition from FiT to auctions would bring forward opportunities and challenges. He hoped that Germany’s experience and expertise would be shared in abundance today. He also thanked Asia Counsel – the session’s sponsor.

Ms. Vu Quynh Le – Deputy Director General, Public Procurement Agency, Ministry of Planning and Investment – confirmed Vietnam’s appreciation towards the German Embassy and German experts. She also gave an overview on Vietnam policies and guidelines regarding the FiT scheme. She noted that the FiT scheme showed some limitations, including lack of competition and laggard technologies. In order to meet the targets set in “Vietnam’s National Energy Development Strategy to 2030 with a vision to 2045”, which focused on renewable energy and private sector, the Prime Minister of Vietnam required researches on transition to competitive auctions, particularly in light of the upcoming end of FiT scheme for solar and wind energy. She stressed that Germany gained success and had a wealth of experiences in mechanism transition, so it would be grateful if Vietnam could learn numerous actionable insights today.

Mr. Weert Börner – Deputy Head of Mission & Head of Economic Section, German Embassy in Hanoi – thanked the organizers for hosting such a meaningful series of events to promote the renewable energy auction mechanism in Vietnam. He noted that in the face of climate change, this mechanism would rise as a trend and a challenge to the world. In 2021, Vietnam and Germany both set a target of producing 50% of their electricity from renewable energy sources. Germany did not enjoy the same abundance of hydroelectric, solar and wind resources as Vietnam, so Germany made considerable efforts to achieve its targeted energy shares. The Government of Germany valued seamless transition, and an auction mechanism would be the way to strengthen competitiveness, encourage technology advancement, and secure Germany’s success in the landscape. After Germany approached various sectors of the renewable energy industry, the number of small and medium-sized enterprises increased significantly. He emphasized the regulator’s commitment to and engagement with the German government and private sector in the exchange of experience for Vietnamese markets.

Mr. Thomas Krohn – Project & Portfolio Manager, GIZ Energy Support Programme in Hanoi – introduced a renewable energy auction system under the Renewable Energy Sources Act (or EEG) of Germany. He went into deep dives on the transition from FiT to auctions, the auction system and lessons learned. By 2000, before the EEG, the Government of Germany set out FiT principles still applied to this day: (1) all RE projects can be connected to the grid, (2) RE dispatch must be prioritized, and (3) the Government can provide subsidies of up to 90%. By 2003, Germany released EEG. FiT increased at some point in 2004, then gradually decreased as solar and wind power capacity expanded. Between 2009 and 2011, Germany amended its EEG to provide subsidies for offshore wind energy. However, no offshore wind projects had yet to be launched. Since 2013, the Government’s subsidies kept decreasing, except for offshore wind projects (the subsidy showed a slight increase). Offshore wind power also started to play a minor role in total installed capacity. Currently, the FiT rate is set around 5-7 € cents/kWh for all kinds of technologies.

Germany divided the auction framework into four parts: (1) auction demand by category and capacity, (2) winner selection and agreement award process, (3) qualification requirements and documentation, (4) risk allocation and remuneration of sellers. In part (1), Germany identified nine technology categories, each required different auction options. All would be explored in the video. Innovation, such as floating solar power, solar cells, solar power + agriculture, would be granted subsidies. In part (2), he expanded on the auction process in Germany: set volume; standardize pre-qualification requirements; set deadline for submission; check bids by price, volume and then random; announce winner; developers receive deposit and develop the project in about 2 years before asking for subsidies. In part (3) – planning, he stressed that the Government of Germany placed attention on land planning, spatial planning and use permits. Submission deadlines and permit requirements were also addressed specifically and should be strictly followed. In part (4), he talked about how the Government decided project subsidies based on market price, risks faced by the bidders, the grid operators and the grid system. Risks were analyzed in terms of grid connection, grid congestion & curtailment with a focus on offshore wind projects. In Germany, the players were required to follow the rules and stick to the schedule. If compliance were not met, penalties would be imposed according to how far they were behind the schedule.

Before concluding his presentation, Mr. Thomas drew the following conclusions from his German experience. To begin, RE communities in Germany could collaborate with civil organizations to auction up to six 16-MW wind turbines, with the bid starting at the highest bid in the previous auction. This explained why, despite a lack of resources (for evaluation, survey, research, etc.), these communities won almost all bids in 2017, resulting in policy change in 2018. Second, grid connection issues hampered offshore wind expansion. Due to unclear responsibility assignment from the beginning, a new mechanism was required to compensate for the loss. Finally, in terms of economic impact, Germany was able to reduce subsidies by an average of four times.

The session continued with the presentation of Mr. Juan Frias – Assistant to Head of Wind & Site and Principal Consultant at Offshore Wind Consultants (OWC) – presented on his extensive experience in bidding document preparation in Germany. He went through the time when Germany applied the FiT scheme (since 2000) under EEG Law, which helped the government and businesses save money by utilizing stable technologies. After the market went downhill due to various issues caused by the FiT scheme such as unstable connections, unequally planned infrastructure, site disputes, etc., Germany decided to transition to auctions. The Marine Energy Act, which came into force in 2017, stipulated that the FiT scheme should be used in the early stages, and then all wind power projects would be auctioned off in 2021. During this transition period, between 2017 and 2018, Germany installed nearly 3 GW of electricity and some investors even did not require subsidies. In 2019, the basic auction framework was completed and the prices kept decreasing while the capacity surged. In terms of planning, Germany aimed to expand offshore wind to 7.5 GW by 2030 and 13 GW by 2035.

Similar to Denmark, Germany also deployed 1-stage and 2-stage auctions, which address environmental regulations, wind capacity assessment, geodesy, geology, resources and contractor capacity. More importantly, the proposed plan must integrate seamlessly with the infrastructure and grid system without increasing the overall system’s waiting time. Agencies that manage grid systems, as well as other agencies that manage heat, gas, railroads, marine environmental surveys, etc. work together to develop a master integration plan that ensures smooth deployment and proper allocation without overlapping. Characterized by a small sea area, Germany could connect offshore wind projects to the mainland grid and share costs with project developers. In the following phase, Germany began to investigate offshore wind areas in the Exclusive Economic Zone (EEZ) – North Sea. Germany increased its offshore wind expansion target from 20 GW in 2035 to 40 GW in 2040. Emphasis on marine planning and development of a transparent and highly competitive auction process was Germany’s algorithm for success in the renewable energy space.

Due to time constraints, the final presentation of Dr. David Jacobs – Managing Director of IET Consulting (Video) with the topic “Assessing the applicability of wind energy auctions for Vietnam” would be published later on PECC3’s event channel.

Mr. Bui Van Thinh – CEO of Thuan Binh Wind Power JS Co., President of Binh Thuan Wind and Solar Energy Association – moderated the session. He summarized the current state and challenges of the renewable energy industry in Vietnam, as well as concerns about wind power tariffs after 2021, before inviting Ms. Tran Thi My Dung to ask the speakers questions.

Ms. Tran Thi My Dung – Head of Division, Price Management Department, Ministry of Finance: Could you please provide more details on the bid evaluation criteria and process in Germany, as well as the costs associated with subsidy policy? Germany’s tariff and ceiling policy? And do you have any suggestions for Vietnam?

Mr. Thomas Krohn – Project & Portfolio Manager, GIZ Energy Support Programme in Hanoi: In Germany, the lowest bidder wins. If there are multiple lowest bidders, the award will be given to the bidder with the lowest capacity. If there are multiple lowest bidders with the same capacity, we will choose at random. Joining auctions costs businesses between 500 and 700 euros, which includes all related procedures. According to GIZ, if a country wants to use the auction scheme, it must meet four criteria: (1) large market, (2) high competitiveness, (3) complete policy framework, and (4) transparency in the long-term development roadmap. Concerning condition (1), Vietnam can begin with 4-5 GW of wind power and 10 GW of solar power, and solar power in Vietnam is significant enough to conduct some testing. Concerning condition (2) – competitiveness, I believe solar power in Vietnam can meet this requirement, but I am not so sure about wind power. Concerning condition (3) – policy, Vietnam has strengthened its policies, regulations, and legal framework. However, there are numerous tasks that must be completed before we can implement these regulations in a flexible manner. Concerning condition (4) – project roadmap, the soon-to-be-published Power Development Master Plan 8 will reveal the capacity that Vietnam will require in the coming years. My suggestion is that Vietnam should utilise a stepping stone transition, running the FiT regime and the auction scheme simultaneously first, and with the solar market first.

What total capacity should be announced to the public per auction? Should we conduct a full procurement process for EACH project ranging from a few dozen MW to several hundred MW?

Mr. Thomas Krohn – Project & Portfolio Manager, GIZ Energy Support Programme in Hanoi: We can get the total required capacity from the national electricity development plan, then divide it by the number of auction rounds held, we will have the capacity be announced for each round. Before going through plenty of evaluations and considerations, each project must be licensed, planned, and thought through at both the central and local levels. If the project is too small, it will put a strain on the entire system.

How will Germany determine the capacity of each technology (wind, solar, and biomass) in an auction scheme? Who’s responsible? Government or independent organization? Will they bid among the projects or on a specific project in the onshore and offshore wind power auctions? Will the auction price be valid for the next 20 years?

Mr. Thomas Krohn – Project & Portfolio Manager, GIZ Energy Support Programme in Hanoi: According to the most recent EEG Law, the Bundestag will establish output targets for specific milestones such as 2021, 2030, and 2040. As stated in my presentation, auctions in Germany are capacity-based, and bidders must meet pre-qualification requirements to participate in the auctions, such as turbine construction permits, environmental impact assessments, etc. The bid price window is 20 years long, and the government may use a subsidy regime if there is a price difference.

The Global Wind Energy Council’s assessment of the potential and development of wind power in Vietnam?

Ms. Liming Qiao – Asia Director at Global Wind Energy Council (GWEC): The wind market in Vietnam holds great promise, but we need to analyze offshore wind and onshore wind separately. According to the draft of the Power Development Master Plan 8, we believe that the target of 11-12 GW of wind power by 2005 is achievable if the auction process is well-designed, ensuring a smooth transition from the old scheme. In terms of onshore wind projects, a question that remains unanswered is whether Vietnam should maintain the FiT scheme, as many projects were unable to be completed on time due to COVID impacts. Once Vietnam switches to auctions, projects may go unfinished or abandoned, making things worse for parties and eroding their trust. If the targets are to be met on time, Vietnam may consider expanding the project schedule by capacity and urgently prioritizing the issuance of transportation permits and installation permits for seabed survey equipment.

In terms of offshore wind projects, the scheme is not expected to be finalized until 2025 due to the complexity of survey and technical handling. By that time, the FiT will have expired. To avoid delays, we recommend that Vietnam utilise a transition, whose benefits were clarified in the Danish session, or combine both schemes. In Germany’s case, they had a long period of overlapping, meanwhile, the UK, Denmark and even Taiwan all underwent a stepping stone transition and successfully introduced new mechanisms. France is another example, if there is no transition to auction, it will be difficult to get the scheme off the ground. We can learn from other countries’ experiences, and we should set a stepping stone target of 4-5 GW before implementing a full-fledged auction scheme.

As a lawyer, how do you see Vietnam’s current regulations on renewable energy project development, such as PPAs?

Mr. Ross Macleod – Partner, Asia Counsel: Vietnam has made some progress and is eager to clarify standards for investors. After the initial 20-year period of the FiT scheme, we should add a stepping stone transition to test the market before moving to auctions. Auctions are a major source of concern, especially when it comes to bank lending procedures. We can see many problems with the PPAs with EVN, such as the bank lending lacks reliability, the PPA lacks project insurance clauses, and so on. Furthermore, because EVN has complete control over the development of infrastructure such as the grid system, transmission lines, there is a risk of no compensation payable. International banks and investors are also hesitant to settle disputes or enter into EVN-benefiting agreements. The agreement’s termination or compensation is governed by Vietnamese law, and investors bear the entire loss. As the market expands and the project size grows, the legal framework must be better prepared to ensure equal benefits for all parties and attract international investors.

Vietnam needs a post-FiT policy to respond with the investment and development of the RE sector. Based on the German experience, what are the steps and roadmap for Vietnam?

Mr. Jochen Hauff – Director of Corporate Strategy, Energy Policy & Sustainability, BayWa r.e: I agree with Ms. Liming Qiao that we must avoid interruptions during the transition. A good auction system can create confidence in investors, so we should test several small-scale auctions in familiar sectors then moving on to newer areas such as offshore wind power. Vietnam can benefit from other countries’ experiences to accelerate the implementation and avoid the delays encountered by Germany. There is a case study in Germany. 90% of wind projects were located in the North, while key industrial zones gathered in the South and resorted to high radiant solar power. We did not re-plan the site allocation for auction until 2021. It’s a pity that it took us so long to realize and change this situation. I agree that a stepping stone transition is necessary, we should run the FiT scheme and the auction scheme simultaneously. Vietnam does not have much time, it could not build a scheme in 1-2 years and then wait for 7-8 years to see the results. I believe Vietnam should take advantage of this stepping stone transition right away. Taking lessons from Germany, Vietnam should allocate wind and solar power sites by region, because the transmission systems of these two powers can compensate for each other.

What are the minimum infrastructure conditions (supply, transmission and grid systems…) to start the auction scheme?

Mr. Jochen Hauff – Director of Corporate Strategy, Energy Policy & Sustainability, BayWa r.e: In Germany, many discussions with infrastructure managers were conducted to reach an agreement on the volume to be connected to the grid system. As Mr. Thomas stated in his presentation, Germany managed the connection from the beginning. So we focused on building positive relationships with those in charge, and developing supporting platforms such as storage technology. Not until last year did Germany start auctions for new technology such as battery storage, and only with small capacity as a test. Legal and regulatory frameworks are also sources of challenges, so having grid operators on board would make things go more smoothly. This issue was also influenced by the demand for renewable energy, which created a balance with the grid operators. People would benefit more this way. We prioritize sustainable development over project profits. People may express their dissatisfaction if there are too many bidders or too many projects. It means, Vietnam must devise a well-thought-out strategy to prepare for any eventuality that may arise as the market expands.

Is there any requirement on waste treatment after official launch in the proposal for RE projects?

Mr. Pham Anh Dung – Deputy Director General of Environment Impact Assessment and Appraisal Department, Vietnam Environment Administration, Ministry of Natural Resources and Environment: Waste treatment is required by Vietnamese regulations in any manufacturing process. In the case of wind and solar projects, blades or panels present some difficulties. Vietnam is conducting some research on solar cell treatment, but it is the investor’s responsibility to handle waste from renewable energy. This requirement must be incorporated into the proposal.

At the end of the session, Mr. Bui Van Thinh summarized the key findings and expressed concern about the policy that would replace the FiT scheme for wind power, which will expire on October 31, 2021.

Ms. Nguyen Thi Dieu Phuong – Director of Center for Procurement Support noted that: Now the 4th session of the webinar series has come to the end, the lessons to be shared and the questions to be raised are countless. Organizers hope that this series would give a spark to broader activities, assisting the government and regulators in building a suitable auction scheme and legal framework for the next era of renewable energy.

To get an overview of other sessions (Denmark, India, UK, USA), please find details at the website of Power Engineering Consulting JS. Company 3 (PECC3). We are proud bringing our integrity and trust to our distinguished partners through this webinar series.

https://www.pecc3.com.vn