Energy & Infrastructure Insights — The Road to Net Zero: Offshore Wind Farms Are Gaining Momentum

Germany and Europe aim to be carbon-neutral by 2050, with wind energy set to become the most significant source of energy in the future. However, in Germany, the pace of deployment is still insufficient. Chancellor Olaf Scholz has recently announced his intention to progress the expansion of wind energy “with military precision”.

What challenges does the industry face and what must Germany do to become more attractive for investors? Tobias Larisch, a partner in Latham’s Energy & Infrastructure Practice, spoke to Stefan Thimm, managing director at the Federal Association of Wind Farm Operators Offshore (Bundesverband der Windparkbetreiber Offshore e.V.).

Thimm forecasts that offshore wind energy will further expand its crucial role for the security of energy supply and Germany’s national grid — in particular regarding the production of green hydrogen. However, the German government now needs to provide investor-friendly arrangements, including through well drafted Contracts for Difference (CfDs).

Larisch: Germany and Europe aim to be carbon-neutral by 2050. What role does offshore wind energy play in the journey to net zero?

Thimm: A leading role — both in terms of shaping Germany’s national grid in 2030 and especially in 2045 and facilitating green hydrogen production. Relevant long-term scenarios, such as the research project the Fraunhofer Institute for Systems and Innovation Research completed for the Federal Ministry for Economic Affairs and Climate Action in 2022, suggest that offshore wind technology would generate approximately 250 TWh out of an overall electricity demand of 1,237 TWh (according to the T 45 electricity scenario) — accounting for more than a quarter of Germany’s total electricity demand. Offshore wind energy therefore forms a key component in ensuring a stable energy supply — which already applies today and will increase further throughout the upcoming decades.

"Offshore wind energy therefore forms a key component in ensuring a stable energy supply — which already applies today and will increase further throughout the upcoming decades."

Stefan Thimm, managing director, Federal Association of Wind Farm Operators Offshore

Larisch: The Federal Ministry for Economic Affairs is also exploring how the government could use Contracts for Difference (CfDs) to establish an industry price for electricity, thereby acting as a “market maker” to absorb contingency risks and coordinate supply and demand. How would you evaluate this discussion?

Thimm: First of all, we appreciate that German politics has rightfully acknowledged the significance and potential that offshore wind energy holds for lowering electricity prices. The CfDs which you mentioned could play a significant role in this regard. However, much depends on detailed CfD drafting, since offshore wind suppliers in particular can draw upon other ways of marketing, such as power purchase agreements (PPAs). Instead of curbing such alternatives, we need two functional segments — one for CfDs and one for PPAs.

Larisch: How do the CfDs work in practice?

Thimm: In a CfD, the bidder sets a price for which he would purchase electricity from an offshore wind farm at a premium. Unlike the usual process in Germany, they would not be bidding for a minimum price, but for a fixed rate that has been adjusted in line with minimum and maximum costs. If the market rate for electricity falls below the supplemented price, the facility operator will receive the shortfall in accordance with the current market premium. However, if the market rate lies above the supplemented price, all profits will need to be repaid.

Since the topic is complex, readers might want to visit our website for additional, detailed information on CfDs: https://bwo-offshorewind.de/cfd/

Larisch: How would you evaluate CfDs in comparison to the variable market premium?

Thimm: CfDs offer tremendous advantages since they improve the cost efficiencies for the expansion of renewable energy. They also prevent overfunding during competitive tenders and ensure that countries can meet minimum carbon reduction targets. 

CfDs drastically reduce the financing costs related to the net zero transition. The financing currently makes up the lion’s share of total costs that offshore projects generate. Several research institutions estimate that CfDs could reduce electricity production costs by approximately 30%. CfDs therefore strengthen Germany’s industrial power among international competition and help to preserve jobs.

Larisch: How did countries fare that had previously introduced CfDs, and what could Germany learn from them?

Thimm: Neighbouring European countries have experienced many positive outcomes from CfDs. The European Commission also favours CfDs alongside PPAs as its preferred tools for expanding the use of renewable energy.

In the UK, the cost of offshore wind power has decreased considerably in recent years, by virtue of CfDs in particular. The UK’s success in using CfDs has not gone unnoticed in other neighbouring countries: France has also successfully implemented CfDs — as have Denmark, Poland, Ireland, and Lithuania. 

However, readers should note that CfDs only work if they have been properly drafted. The current political climate, supply chain issues, and rising cost of raw materials and facilities clearly demonstrate that CfDs ensure a safe expansion only if they are correctly indexed, i.e., being linked to cost development. The solutions for this problem already exist — it’s simply a matter of drafting.