Offshore wind in The Netherlands - ACM sets regulation for TenneT

Background and purpose

On 29 September 2016 the application period for the second (out of five) Dutch offshore wind tender has been closed. [1] These tenders relate to the building and operation of the wind farms, the winners are not responsible for the development of the grid at sea. As the formally appointed grid manager at sea, TenneT entails the responsibility for the construction and exploitation of the high-voltage grid at sea.

The grid at sea is primarily funded by a direct subsidization scheme and not by the charging of transmission tariffs. TenneT is therefore not allowed to charge a transmission tariff for the transport of electricity generated by the wind farms that will be connected to its grid, but is provided with a subsidy.

ACM determines the authorized income of TenneT on an annual basis in respect of its offshore wind farm investments by testing among other things the efficiency of its investments.[2] Thus, the amount of the subsidy granted to TenneT for the operation of the offshore wind system corresponds with the annual decision of ACM with regard to the aforementioned authorized income of TenneT.

If the subsidy is insufficient TenneT in its capacity as the system operator of the offshore transmission system may charge the difference to TenneT in its capacity of national (onshore) TSO. This amount will be incorporated in the transmission tariffs charged by the national (onshore) TSO.

In the formal preparatory procedure ACM made the draft method decision available for public consultation on 27 May 2016 and stakeholders had the opportunity to give their views on this draft.

Points of attention in the method decision

In the method decision ACM determines what cost of capital needs to be used in order to calculate the allowed economic return. The cost of capital, or weighted average cost of capital before tax (hereafter: "WACC"), is determined by ACM on a normative basis. This means that ACM did not calculate the WACC on the basis of the actual debt to equity ratio of a specific company, but that the debt to equity ratio of an efficiently financed grid manager is used as a starting point. On this basis ACM decides that a WACC of 3.6% in 2016 and 3.0% in 2021 applies for the development of the grid at sea.

The most interesting part of the recent method decisions of ACM with respect to the land grid and the sea grid is that the grid manager is no longer allowed to settle operational costs afterwards if the operational costs turn out to be higher than estimated. TenneT argued that it is unreasonable for it to bear the full risk of higher than estimated operational costs, especially in the context of an energy market that is in transition. According to ACM, TenneT would however be no longer sufficiently incentivized to keep the operational costs at an efficient level if it is possible to settle unexpected costs afterwards. TenneT already announced to appeal this aspect in the method decision concerning the grid on land.[3] In the method decision for the sea grid this issue is less problematic for TenneT, as the cost estimation is only made for a one year period instead of a five year period in case of the grid on land.

Third parties furthermore argued -with no success- that a depreciation period of at least 25 years would be more appropriate than the current 20 years, as research of the International Energy Agency showed that the technical life of an offshore wind farm is 25 years.[4] Parties also opposed the fact that ACM determined the regulatory period to be equal to the maximum statutory five years instead of the formerly applicable three year regulatory period. According to ACM a longer period provides however more regulatory certainty with respect to the amount of income. Furthermore, ACM argued that a longer period also provides more legal certainty. ACM notes with this respect that in the past not all previous method decisions were already irrevocable at the moment that ACM needed to adopt subsequent method decisions.

Finally, both TenneT and third parties argued that regulations needed to define explicitly what circumstances would qualify as a situation of gross negligence. On the basis of the Electricity Act 1998 the grid manager is liable to pay damages for delay in the delivery of the connection or for unavailability in the meaning of transport restriction of the delivered connection. In that situation a maximum amount of EUR 10 million of damages in one year will not be taken into account in the total allowed income of the grid manager. ACM rejects this demand and states that by not defining the situation of gross negligence upfront, the specific circumstances of a possible future incident can be better assessed on the merits.

Conclusion

With the adoption of the method decision for the grid manager at sea, the Dutch regulator has established the rules to calculate the allowed economic return of TenneT. Parties concerned have the opportunity to appeal the method decision until 28 October 2016 at the Dutch Trade and Industry Appeals Tribunal. If parties will not appeal or appeal unsuccessfully this method decision will be binding.