Germany: Legal Guidelines For Offshore Project Contracts

Last Updated: 4 September 2014
Article by Rainer Heidorn

Introduction

Germany's offshore wind industry and its related legal framework have reached a certain level of maturity, yet many contract issues remain unresolved in project practice.

This guidance provides an overview of standard contract issues in offshore projects within a commercial and technical context and also from the perspective of practitioners. Moreover, it includes some less well-explored contractual issues, such as the integration of Fédération Internationale des Ingénieurs Conseils (FIDIC – International Federation of Consulting Engineers) Contracts into German law, aspects of certification or operation, and the maintenance phase. However, the issues covered here are subjective, with some topics omitted from this report.

Contractual topics

Grid connection and feeding into the grid

Legal framework for grid connection

On 28 December 2012, amendments to the German Energy Act (Energiewirtschaftsgesetz, EnWG) brought about substantial modifications to

grid connection provisions for offshore wind farms in Germany. Sections 17b – 17d of the amended EnWG require transmission system operators (TSOs) to draw up an offshore grid development plan. This sets out key milestones and obligations, including completion dates, for installing grid connections to offshore wind farms.

The offshore grid development plan must be prepared by a competent German TSO and will become binding on the TSO once approved by the Federal Grid Agency. Typically, it comes into force and effect once transferred into a federal plan of demand (Bundesbedarfsplan).

The programme for constructing grid connections for offshore wind farms is set out in the offshore grid development plan. The establishment of deadlines and the procedure for completing offshore grid connections are described in detail in Section 17d EnWG. The TSO must publish the expected completion date, which becomes binding 30 months prior to that date. At this point, the offshore wind farm opera- tor is entitled to demand connection to the offshore grid and achieve the electrical capacity awarded by the Federal Grid Agency.

The offshore grid development plan includes the "Start Offshore Grid" and the "Additional Offshore Grid". All grid connections that have al- ready been completed, or which will be built subject to valid grid connection approval, are part of the Start Offshore Grid. The grid development plan is currently in the draft stage and may undergo further amendment prior to going into effect.

According to Section 118, paragraph 12 of the amended EnWG, the pre-28 December EnWG continues to apply for offshore wind farms that were granted either unconditional or conditional grid connection approval prior to 29 August 2012.

Where approval for connection to the grid was conditional, the wind farm operator had to demonstrate compliance with the unconditional approval terms for grid connection by 1 September 2012. These requirements were stipulated in a Federal Grid Agency position paper on grid connection obligations, dated October 2009.

Clause 2.4.2 in the position paper stipulates that the competent grid operator is obliged, in principle, to issue an unconditional grid connection commitment once the wind farm meets all the grid connection criteria. These criteria include:

  • a permit, required under public law, for installation of offshore turbines,
  • a plausible construction schedule,
  • soil investigations carried out in all locations,
  • binding financing commitments or preliminary agreements regarding purchase orders for the principal wind turbine components.

If all the criteria are fulfilled, the TSO is obliged to connect the wind farm to the grid, in accordance with Section 17 paragraph 2a of the pre-28 December 2012 EnWG. The grid connection must be established once the offshore turbines achieve operational readiness.

Conversely, where unconditional grid connection approval was issued prior to 29 August 2012, the wind farm operator must have turbines ready for operation within 18 months of the binding completion date of the offshore grid connection. If the operator fails to comply, the Federal Grid Agency is entitled (but not obliged) to allocate the feed-in-capacity to other offshore wind turbines, in accordance with Section 17d of EnWG.

Grid connection costs are imposed on TSOs, with Sections 17a – 17d of the EnWG superseding Section 13 of the German Renewable Energy Act (Erneuerbare-Energien-Gesetz, EEG). The general grid connection provisions in Section 5 of the EEG also apply, in principle, to offshore wind farms. Pursuant to Section 5, paragraph 1, sentence 1 of the EEG, grid operators are legally obliged to connect plants for the generation of electricity from renewable energy sources without delay and must prioritise the network connection to the grid. In line with Section 4, paragraph 1 of the EEG, fulfilling this obligation is not necessarily dependent on a contract. Though the grid operator may not require the conclusion of a grid connection agreement, it is permitted to conclude such voluntarily.

The wind farm operator has the right to compensation for delayed grid completion. Where an offshore wind turbine is ready to operate, but is prevented from feeding-in the electricity for more than ten consecutive days due to technical grid outages or grid maintenance activities, the operator may seek compensation from the 11th day on for lost revenues at 90 percent of the remuneration the operator would have otherwise received, in accordance with Section 17e paragraph 1 and 3 EnWG. Compensation is payable irrespective of whether the interruption is caused negligently by the TSO or not.

Compensation is also payable where completion of the grid is delayed by more than ten days. Entitlement to compensation is not affected if the foundations and offshore substation are complete but the turbine has not been installed in order to mitigate potential damage. The wind farm operator must reimburse the compensation where the turbines are not installed nor made ready for operation within a reasonable period set by the Federal Grid Agency. If the delay is caused wilfully by the TSO, the wind farm operator may be compensated for 100 percent of the opera- tor's lost revenues. On 16 July 2013, the Federal Grid Agency issued draft guidance on the calculation of compensation and its apportionment to grid costs.

The wind farm operator must inform the TSO whether the losses due to the delayed completion of the grid connection shall be compensated under Section 17e EnWG or whether the initial feed-in-tariff shall be extended as provided under Section 31 paragraph 3 of the EEG.

The TSO's liability to wind farm operators for negligent property damage is limited to Euro 100 million per single event.

Electricity feed-in

In accordance with Section 8, paragraph 1, sentence 1 of the EEG, grid operators are obliged to accept all electricity generated by the turbines that is offered to them and to transfer and distribute it. Subject to the conditions described in Section 11 of the EEG, the grid operator is entitled to undertake feed-in management to control the amount of electricity fed into the grid by the turbines. Conversely, however, the wind farm operator is entitled to compensation, limited to 95 percent of lost proceeds, for electricity not fed into the grid, as described in Section 12, paragraph 1, sentence 1 of the EEG. The limit does not apply if the loss of proceeds exceeds 1 percent of annual revenue.

Electricity taken off by the grid operator must be remunerated, as de- scribed in Section 31 of the EEG, at a tariff of 3.5 cents per kWh (basic payments). Initially, however, a 15 cents per kWh (higher initial payment) tariff is granted for twelve years from commissioning the respective offshore turbine. The duration of initial payments is extended by 0.5 months for every full nautical mile beyond twelve nautical miles that the turbine is situated from the coastline, and by 1.7 months for every full meter's water-depth above 20 m.

In accordance with Section 31, paragraph 3 of the EEG, the wind farm operator can claim an initial payment of 19 cents per kWh for the duration of eight years from commissioning. Once expired, the distance and water depth-dependent extension of the initial payment continues to apply at 15 cents.

If turbines cannot feed in generated electricity for a period of more than seven consecutive days because the grid connection is either not ready or is interrupted, the initial payment or payment from the compression model, as the case may be, will be extended. This starts from the eighth day of interruption or delay. Interruptions of seven days or less do not merit extension.

At the end of the higher initial payment period, the feed-in payment will be reduced, in accordance with the EEG, to 3.5 cents per kWh. This tariff is guaranteed for 20 calendar years, plus the period from commissioning the respective turbines until the end of the year of commissioning.

Project contracts

Implementing an offshore wind farm is a project of highly complex design, technology and management, which is further reflected in the contractual detail.

Project stages

An offshore project is conducted over different phases, as set out in the BSH (Bundesamt für Schifffahrt und Hydrographie – Federal Mari- time and Hydrographic Agency) standard "Design of Offshore Wind Turbines". From the licensing authority's perspective, the BSH distinguishes between the development phase, the design phase, the execution phase, the operational phase and the dismantling phase. From a contractual perspective, the design and execution phases are combined in an implementation phase.

The material aim of the development phase is to obtain an operating permit. Contractually, this does not tend to be problematic. Milestones are not typically part of a "critical path" as contracts are not linked to a timescale. Works and services to be contracted in order to obtain the permit include soil investigations, environmental assessment studies and analysis of risk of ship collisions. Meteorological studies, as well as energy yield projections, are required.

The implementation phase covers supplies and services for installation of an offshore wind farm through to commissioning. The four "main components" are the wind turbines, the turbine substructures, inner wind farm cabling and the transformer platform. The design, fabrication, onshore and offshore transportation, installation and commissioning are procured separately for these main components.

In addition, various ancillary service contracts have to be concluded. These include contracts with a marine warranty surveyor. This independent expert is usually engaged under an insurance policy to examine and approve all offshore transport operations. Charter agreements for the work coordination vessel and other transport vessels are drawn up and the certifying body and external service providers are appointed under contract. In additional, lease contracts are required in harbour areas and in certain areas of the transformer platform. Apart from construction- related agreements, contracts for insurance, debt financing and equity may be needed.

Contractual structuring

Prior to the tender, the full scope of works and supplies is specified by the project owner in a matrix of work packages, determined by the technical, commercial and legal specifics of the project. In a simplified model, the works for the four main components are awarded to four engineering, procurement, construction and installation (EPCI) contractors. There is no standard contract profile and, in project practice, multiple combinations of work packages may be arranged. Tailoring work packages largely depends on technical and commercial considerations, industry practice, banking requirements and the project owner's capacity to control contractors and manage interfaces.

The tender process is initiated once the technical and contractual requirements have been fully described. Typically, public employers are bound by European tender rules, including Sections 98 et seq. of the German Anti-Trust Act (Gesetz gegen Wettbewerbsbeschränkungen, GWB) and the Procurement Ordinance (Vergabeverordnung, VgV) or the Sector Ordinance (Sektorenverordnung, SektVO), and are required to arrange a public tender process. These rules are not mandatory for private employers. However, where credit is provided by public financing entities, like the European Investment Bank (EIB) or Kreditanstalt für Wiederaufbau (KfW), it is a usual condition that fair and transparent procedures are used and that the contract is awarded to the most commercially economic bid. General

Construction supplies are governed by either sales contracts or con- tracts for works under German civil law. The type of contract depends on the nature of the works and services assumed by the contractor.

Where the contractor is involved in the delivery of goods and transfer of ownership, but not in the manufacturing of products, the contract takes the form of a purchase contract. Where the seller manufactures the goods, this constitutes a contract for works whereas, under Section 651 of the German Civil Code (Bürgerliches Gesetzbuch, BGB), sales con- tract provisions apply where sold (and manufactured) goods are movable assets. If the seller also assembles and installs the goods, then the type of contract is determined by the principal type of activity.

The definition of activity varies by jurisdiction. For instance, the German Federal Court generally deems the delivery of machines to be a sales activity, even where design is part of the scope of works. Meanwhile, the Court of Appeal in Schleswig qualifies delivery of an onshore wind turbine as a sales contract activity, yet the district courts of Kiel and Hannover consider the laws for a contract for works to apply.

In most instances, the statutory qualification has no real significance since contract provisions tend to be individually agreed. However, commercial sales provisions will apply to sales contracts, obliging purchasers to immediately examine goods and to notify defects without delay or forfeit their rights under warranty. These regulations are not appropriate for most work packages and should be excluded.

Unfair trade terms

During contract negotiations, the influence of the provisions on unfair trade terms (Allgemeine Geschäftsbedingungen, AGB) must be considered. Contracts based on a standard template are subject to the provisions described in Section 305 et seq. of the BGB, meaning that unfair trade terms will be dealt with by the courts.

The same regulations can apply, in principle, to commercial parties. Any contractual terms may be considered as AGB if used in various contracts or if intended for re-use by the introducing party in subsequent con- tracts. In case law, the contractual partner who invokes the protection of the statutory AGB provisions must prove the similarity of the contractual term to AGB. Where the provisions are printed or otherwise reproduced, this is presumed prima facia evidence. Individual amendments, during intense negotiations, may lead to requalification. Nevertheless, the burden of proof for classification as an individual agreement lies with the party that uses the standard template.

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