In the Netherlands, the highly successful SDE++ subsidy scheme for onshore wind and solar energy projects will be abolished and replaced with a two-way Contract for Difference (CfD).
Pursuant to the Climate Agreement (Klimaatakkoord) beginning 2025 no new SDE++ subsidies will be provided. However, according to outgoing Minister for Climate and Energy Rob Jetten, it is irresponsible to halt all subsidies after 2025 since this would lead to a stagnation in the deployment of onshore wind and solar projects. Some form of subsidy will therefore remain necessary. Given that the EU Electricity Market Design Directive prescribes CfDs (or an equivalent) for any form of state aid for renewable electricity generation, it is envisaged to make CfDs available for new onshore wind and solar projects.
A CfD is an agreement entered into between the government and the developer of an onshore solar or wind project that sets a fixed price for the electricity generated. If the market price for electricity is lower than the agreed price, the government will pay the difference up to the agreed amount. Vice versa, if the market price exceeds the agreed price, the project developer will pay the surplus to the government. In principle, subsidy payments under the SDE++ subsidy are similar to a CfD. The main difference, however, is that under the SDE++ subsidy, revenue above the agreed price (i.e. surplus) does not have to be paid to the government but instead may be kept by the generator.
Despite calls from parties in the energy sector, the Netherlands has long opposed the EU mandatory introduction of CfDs, primarily because this would require a significant revision of the existing SDE++ framework. This view seems to have changed with the Minister now advocating the advantages of CfDs over the SDE++ subsidy. Under two-way CfDs, risks are more evenly distributed between generators and the government. Moreover, the government will benefit from renewable energy generation when the electricity price exceeds the agreed-upon tariff. This encourages market players to develop projects independently without subsidies. The Minister requested consultancy firm Trinomics to analyse the various design principles of CfDs. (The report can be found here.) Following this report, the government is currently determining how to shape the CfDs.
Risk of market distortion
Ideally, renewable electricity projects are realised in the market without financial support from the government. Therefore, CfDs must be designed to minimise the risk of market distortion, which could occur because CfDs reduce price signals that will decrease or diminish the natural incentives for generators to adjust their production based on supply and demand (i.e. 'produce-and-forget'). Because a CfD offers a guaranteed price, the generator no longer needs to pay attention to market price fluctuations, which could lead to inefficiency.
To mitigate this risk, the Minister is considering an exception (i.e. carve-out) in the CfD. Under this exception, part of an installation's production (e.g. 20%) will not be covered by the CfD and will not receive direct price support. This could encourage generators to enter into a PPA and sell this part at market price, encouraging generators to remain attentive to price signals and operate efficiently.
Intermediary period and next steps
The Minister anticipates that a new subsidy scheme based on CfDs can be implemented by 2027 at the earliest. Until then, onshore solar PV and wind energy will remain under the SDE++ scheme. As from this year onwards, the SDE++ subsidies will, in accordance with European regulations, include a mechanism for offsetting excess profits against subsidy payments. This is a preliminary step towards CfDs that ensures that excess profits during periods of high electricity prices will be offset against previously paid or future subsidy payments. To facilitate this, a price level must be set above what is considered excess profits (i.e. the revenue threshold amount or opbrengstgrensbedrag). The revenue threshold amount will be incorporated into the Dutch SDE regulations and will remain fixed for the entire duration of a project.
The Minister will announce these new conditions early next year when the new SDE++ round opens in 2025 with the implementation of a new CfD scheme as early as two years later.
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