Application of 30 June 2020 Granting the Federal Republic of Germany

Application

of 30 June 2020

granting the Federal Republic of Germany and the Kingdom of Denmark a derogation according to Article 64 of Regulation (EU) 2019/943 of the European Parliament and of the Council for Kriegers Flak Combined Grid Solution (KF CGS)

THE FEDERAL REPUBLIC OF GERMANY AND THE KINGDOM OF DENMARK, Having regard to the Treaty on the Functioning of the European Union, Having regard to Regulation (EU) 2019/943 of the European Parliament and of the Council of 5 June 2019 on the internal market for electricity and in particular Article 64 thereof, Having regard to Regulation (EU) 2018/2001 of the European Parliament and of the Council of 11 December 2018 on the promotion of the use of energy from renewable sources, Having regard to Commission Regulation (EU) 2015/2111 of 24 July 2015 establishing a guideline on capacity allocation and congestion management, Having regard to Commission Regulation (EU) 2016/1719 of 26 September 2016 establishing a guideline on forward capacity allocation, Having regard to Commission Regulation (EU) 2017/2195 of 23 November 2017 establishing a guideline on electricity balancing apply for the following derogation.

1. INTRODUCTION This application consists of four sections: Scope of the requested derogation, Organisation of the Kriegers Flak Combined Grid Solution (KF CGS), Challenges to the operation of KF CGS and Legal assessment of applying Art. 64. The Kriegers Flak Combined Grid Solution project was conceived as combining the grid connections of the German offshore wind farms (OWFs) Baltic 1 and 2 and of the Danish OWFs Kriegers Flak situated nearby to each other with an interconnector function between Denmark and Germany. This project was undertaken by the two transmission system operators (TSOs) being responsible for the respective offshore grid connections, Energinet and 50Hertz Transmission also operating the assets. KF CGS is the world's first and only integrated offshore system solution linking the radial grid connections of OWFs in different countries, spanning the border between two synchronous areas and using two different current levels along its way. The project was initiated in 2007 and is expected to be finalised in 2020, with the last wind turbines on the Danish side being connected during 2021. The main principle of the operational model for the project i.e. priority access of offshore wind was assessed and underlined in the feasibility study carried out in relation to the project in early 2010. Afterwards the windfarms on the German side were commissioned in 2011 (Baltic 1) and 2015 (Baltic 2). At this point, the understanding underpinning the investment decision was

1 that this operational design conformed with existing EU regulations. The Danish regulatory authority approved the operational design in a decision issued on 15 January 2014 and the system operators and authorities continued to pursue the operational design in good faith. The primary goals of KF CGS, at the time of conception, were to increase the use of the OWF connection lines to shore; increase the contribution of the connected OWFs to security of supply1 by connecting them to respective other grid and with assets allowing for trading electricity; reducing greenhouse gas emissions and contributing to knowledge on developing combined offshore grid systems. In this regard, KF CGS is not a typical interconnector, but an integrated grid connection system for OWFs where the residual capacity of the OWFs’ connection lines to shore not used by the OWFs is made available to other market participants for electricity trade. The project is important in a European context as it is a first-of-a-kind project with multiple functionality as described above as its PCI status and funding by the European Energy Programme for Recovery (EEPR) underline. Funding through the EEPR with up to 150 million Euros made the realisation of the hybrid solution possible as it proved pivotal in ensuring a positive social welfare economic outcome for the project. Only by this support the project became financially viable. The goal of the EEPR was to frontload investments in infrastructure projects that supported economic recovery, contributed to security of energy supply and reduced emissions of greenhouse gases. The project was designed to meet the primary objective of transporting electricity produced by the OWFs to shore and the remaining capacity on KF CGS to be made available to the market for cross-border electricity trade. The new electricity market regulation (EU) 2019/943 clarified rules on the maximisation of transfer capacity for electricity trade. Like in the past regulation (EU) 2019/943 requires providing maximum capacity for electricity trade, specifying that a TSO fulfils this obligation if at least 70% is made available for trade. Up to 30% of the capacity can be used to ensure security of the grid. On KF CGS, as the connection lines of the OWFs to shore are a constitutive part of the system, the generation from these OWFs will be seen as internal flows. This makes it impossible for KF CGS to comply with the requirements in the regulation on cross-border capacity without curtailing offshore wind power production. In the specific case of KF CGS this would lead to significant problems for system operation (for further details see 3.3) as the system has been designed for a different setting.

2. SCOPE OF THE REQUESTED DEROGATION The applicants request a derogation based on Article 64 of Regulation (EU) 2019/943. The provisions of Regulation (EU) 2019/943 to be derogated from are the following:

2.1. Derogation from Article 16(8) of Regulation (EU) 2019/943 The applicants request a derogation from Article 16(8) of Regulation (EU) 2019/943 for the system KF CGS. The derogation shall allow transmission system operators of KF CGS to apply the rules for making transmission capacity available to the market for the residual capacity of the OWF connection lines to shore which is not forecasted to be used by the wind turbines of the German OWFs Baltic 1 and Baltic 2 and the Danish OWFs Kriegers Flak

1 As the German and Danish grid connections are connected by the combined grid solution, it becomes possible to import to DK and DE at any point in time, thus improving the security of supply beyond what a windfarm connected to only one grid will do. This is especially important for security of supply in Eastern Denmark.

2 whilst recognising that the primary function of the KF CGS is to transport generation from the connected offshore wind generators to shore. A curtailment of the three OWFs in order to increase the capacity available to the market would lead to a reduction of renewable energy in the system and could lead to an increase of CO2 emissions and, as curtailment would be applied to offshore wind exclusively while upward regulation for redispatching would be predominantly based on fossil power plants (that continue to be in the markets for a long time period). For the reasons presented in detail below, this derogation shall permit the TSOs by making use of KF CGS to utilise the OWF connection lines for the transport of the offshore wind production first – in accordance with the current capacity calculation methodology (CCM) for the day-ahead (DA) and intraday (ID) timeframes for the capacity calculation region (CCR) Hansa, which was approved by the CCR Hansa National Regulatory Authorities (NRAs) on 16th December 20182 – while the residual capacity shall be made available for cross-zonal trade respecting the operational security limits of the transmission system operators. The minimum level of available capacity referred to in Article 16(8) Regulation (EU) 2019/943 applies to the capacity of the connection lines to shore which is remaining after the forecasted wind production has been deducted, not to the full transmission capacity of the system. According to the current CCR Hansa CCM approved by the Hansa NRAs on 16th December 2018, transmission capacity for the DA timeframe will be based on TSOs DA wind forecasts. Allocated capacity is firm, i.e. possible errors in the forecasts do not limit/curtail the capacity used by market participants as a result of DA capacity allocation. Capacity which remains unused after the DA capacity allocation will be made available in the ID market applying thereby the same principles as for DA.

2.2. Derogation from further paragraphs of Article 12-16 of Regulation (EU) 2019/943 Articles 12, 14, 15 and 16 of Regulation (EU) 2019/943 refer several times to the minimum level of available capacity. In order to allow for a consistent application of these Articles with this derogation, it is necessary that this derogation ensures the following: The minimum level of available capacity applies to the capacity of the connection lines to shore which is remaining after the forecasted wind production has been deducted, not to the full transmission capacity of the system. In this regard, the derogation shall interpret Article 12(7), 14(1), 14(2), 15(2), 15(4), 15(5), 15(6), 15(7), 16(3), 16(4), 16(8) and 16(9) of Regulation (EU) 2019/943 for KF CGS accordingly.

2.3. Derogation from application of the network codes and guidelines The derogation shall include the relevant methodologies regarding calculation and reservation of cross-zonal capacity from network codes and guidelines. Particularly, the derogation shall allow the CCM pursuant to Article 20 Regulation (EU) 2015/1222 (GL CACM), the CCM pursuant to Article 10 Regulation (EU) 2016/1719 (GL FCA), the methodologies for allocation processes of cross-zonal capacity pursuant to Article 40, 41 and 42 Regulation

2 cf. https://energinet.dk/-/media/B1B94C910A5F464FAE3EAED11A90B730.pdf or https://www.bundesnetzagentur.de/DE/Service-Funktionen/Beschlusskammern/1_GZ/BK6-GZ/2017/BK6-17- 141/BK6-17-141_Beschluss_vom_17_12_2018_download.pdf?__blob=publicationFile&v=2

(EU) 2017/2195 (GL EB) to deviate from the relevant requirements in Regulation (EU) 2019/943 (see 2.2.). The reservation of capacity in the long-term (LT) market shall be based on the capacity left over after deducting the installed wind power capacity. The reservation of capacity in the other market time units shall be based on the capacity left over after deduction of the forecasted wind power injection. The curtailment of OWFs caused by the reservation of cross- border capacity for cross-zonal trade shall be avoided in all market time units.

2.4. Duration of the derogation The derogation shall take effect with the commissioning of KF CGS expected in Q3/2020. The derogation shall be applicable as long as the German OWFs Baltic 1 (operational since 2011) and Baltic 2 (operational since 2015) and the Danish OWFs Kriegers Flak (planned operation start 2021) are connected to KF CGS. This duration is in line with the requirements from Art. 64 of Regulation (EU) 2019/943, as it is limited in time and is conducive to integration with the internal market for electricity and increasing competition. Regarding the time limitation, for as long as these OWFs are operational and connected to the system, there would be substantial problems for operation of KF CGS, in particular challenges for the safe operation of the system (see 4.4). A shorter time period would therefore be inadequate, as the challenges would still prevail. As stated in 3.2, without a derogation and a derogation covering the duration applied for, KF CGS would have not been built and this would mean that its contribution to interconnection of the two markets would not have been realised. It has to be taken into account that the inherent congestion causing the need for a derogation was “built” as consequence of the investment decision for KF CGS on the interconnector itself. It cannot be remedied by further grid expansion of the adjacent grids. Possibilities to increase the interconnector capacity are limited both from technical as from socio-economic perspectives (see 3.3). Therefore, a derogation is needed for the complete lifetime of the German OWFs Baltic 1 and OWF Baltic 2 and the Danish OWFs Kriegers Flak.

3. PLANNED ORGANISATION OF KF CGS

3.1. History of the KF CGS The conception of KF CGS goes back to the year 2007. At that time, it became evident that Denmark, Germany and Sweden each envisaged OWFs in their respective exclusive economic zone in the so-called Kriegers Flak area which were to be radially connected to the respective national grids. Originally, the project was therefore started by Energinet, 50Hertz and Svenska kraftnät. In January 2010, Svenska kraftnät due to several reasons decided to withdraw from the KF CGS, whereas Energinet and 50Hertz continued with KF CGS. Later in 2010 Energinet and 50Hertz, together with the European Commission, signed a Grant Agreement (GA) which was an integral part of the foundation for the investment decision (see also 4.4) and which approved the financing of KF CGS through the EEPR with up to 150 mill. Euros . Furthermore, meeting the criteria for projects of common interest (PCI) set out in Article 4 of Regulation (EU) No 347/2013, KF CGS was included in the first list of PCIs as annexed to the Commission Delegated Regulation (EU) No 1391/2013.

3.2. What makes KF CGS unique The KF CGS is a unique project, a pioneer for the development of offshore hybrid projects. It is unique for three main reasons: Timewise, legally and technically. Firstly, as a pioneering project KF CGS is the first of its kind - a feature that other projects cannot claim and use to receive a similar derogation. Secondly, KF CGS was legally designed at a time when priority access for renewables was understood to be in place then, a feature unique to KF CGS, separating it from other/future hybrid projects. Thirdly, the technical aspects of KF CGS are unlike other hybrid projects, making it a unique case.

First of its kind As a first of its kind project, KF CGS provides valuable experience on the configuration of offshore grids on both the technical level and in relation to market integration. In this regard, KF CGS could be seen as a demonstration project in line with Article 3 point (l) of the Regulation (EU) 2019/943. The development of the design of KF CGS and the investment decision occurred during a time when the costs of offshore wind power was at their peak (and substantially higher than conventional generation)3 as were costs for OWF grid connections due to high risks involved in this new business and limited competition at the time. Market rules favoured conventional generation representing the biggest share of generation not only in Denmark and Germany, but in whole of Europe. KF CGS would not have been built if not for the European Energy Programme for Recovery (EEPR) with up to 150 mill. Euro subsidy amounting to a share of 48.2% of the estimated total eligible costs (GA I.4.3). The project was designed to contribute towards collecting experiences regarding the integration of fluctuating generation and increase in efficiency of renewable energy integration. Legal framework For KF CGS a technical and operational model was designed based on the assumption of priority access of renewable energy. This assumption was consistent with the European policies at the time, where the principle of priority access was enshrined in the EU Renewable Energy Directive 2009/28/EC and introduced on national level. This assumption was also shared with the EU Commission (see in more detail below under paragraph 4.4). The KF CGS was new and pioneering in its approach, but very traditional in its objective: to cost-efficiently integrate renewable energy production, improve security of supply and use the opportunity to increase cross-border trade. Since planning and developing of KF CGS the legal setting for renewables production and cross-border trade has changed. Renewables production has gotten more cost-efficient shifting focus to equal treatment of production technologies. Challenges with cross-border trade capacities have resulted in more detailed rules for capacity allocation. Recital 66 of Regulation (EU) 2019/943 concerning offshore hybrid assets reflects the notion that the regulatory framework for those assets should duly consider the specific situation of those assets and reaffirms that legislators acknowledged the special needs of hybrid projects such as KF CGS. This is also in line with the objective of Article 3 point l of the Regulation (EU) 2019/943 which provides that market rules shall allow for a development of demonstration projects into sustainable, secure and low-carbon energy sources technologies or

3 For the development on levelised cost of energy refer to The Economist, May 23rd 2020: Climate brief Energy, p. 50.

5 systems which are to be realised and used for the benefit of society. KF CGS can be seen as a demonstration project which contributes to this development. Technical aspects It is important to note, that KF CGS is a very specific system which differs from any other project due to its specific technical conditions as well as due to the fact that its investment decision was taken under the previous legal framework allowing for priority access of offshore wind (EU Renewable Energy Directive 2009/28/EC). This makes KF CGS different from any other offshore hybrid asset. The system consists of several parts (see also figure 1):  The German OWF grid connections (length: ca. 1364 km, voltage level 150 kV, capacity: ca. 400 MW), built and in operation since 2011/2015;  The Danish OWF grid connections (length: ca. 77/805km, voltage level 220kV capacity: 680 MW) is ready for operation since January 2019;  The back-to-back converter in Bentwisch which asynchronously connects the Nordic synchronous area with the synchronous area in Continental Europe;  The extension of the platform of the Danish OWF Kriegers Flak and the extension of the platform of the German OWF Baltic 2;  The cables linking the two offshore platform extensions (length 24.5 km, capacity: ca. 400 MW, owned jointly by Energinet and 50Hertz); and  The MIO (Master controller for Interconnector Operation).

4 On the German side, there are three sections: Baltic2 to Baltic1: 59,0 km, Baltic1 to Shore: 61,0 km and Shore to Bentwisch: 16,0 km. 5 On the Danish side there are 4 sections. KF DK(A) to Shore: 41.6 km, KF DK(B) to Shore: 44.1 km, KF DK(A) to KF DK(B): 9.0 km, Shore to Bjæverskov: 35.5 km.

Figure 1: KF CGS system composed of KF CGS assets and OWF grid connections KF CGS is the world’s first and only combination of grid connections of OWFs in two countries with a link between the national grids of these two countries within one system. KF CGS links the radial grid connection of the German OWFs Baltic 1 and 2 with the radial grid connection of the Danish OWFs and thereby creates a cross-border connected system between Denmark and Germany with a capacity of about 400 MW. The German OWFs Baltic 1 and 2 have a total installed generation capacity of 336 MW (Baltic 1: 48 MW, Baltic 2: 288 MW) and are in operation since 2011 and 2015 respectively. The Danish OWFs will have a total installed generation capacity of 600 MW, its commissioning is expected in 2022, whereas its radial grid connection is ready for operation since January 2019. The KF CGS system is composed of the following assets:

1. Two onshore voltage source converters (VSC) – forming a so-called back-to-back converter (BtB) – in Bentwisch (Germany); 2. The offshore platform extension Kriegers Flak E (DK) and the extension of the platform of the German OWF Baltic 2; 3. Two HVAC sea cables linking the offshore platform extensions; and 4. The MIO (Master controller for Interconnector Operation); and of the radial connection lines of the OWFs to Denmark and Germany

Only the KF CGS assets (see above No. 1 to 4) were co-financed by the EU Commission.

Figure 2: KF CGS assets The KF CGS system is run jointly by the Danish TSO Energinet and the German TSO 50Hertz. An OWF is normally to be connected to its national grid by applying a "N-0" security level. The KF CGS system creates the possibility for the German OWFs Baltic 1 and 2, in case that their radial grid connection becomes partly or even completely unavailable, to continue their electricity generation to the extent of available capacity on the KF CGS interconnecting system and to feed this electricity into the Danish grid. Respectively, the Danish OWFs will have the possibility to feed their electricity generation at least partly into the German grid. Furthermore, KF CGS forms an additional connection between Denmark and Germany / the Nordic and the Central European markets and grids and contributes to their secure operation. This mutual backup is especially valuable in the rare cases the electricity market has to be suspended in emergency situations. In these ways, KF CGS contributes to security of supply and allows for reducing greenhouse gas emissions.

3.3. Operation of KF CGS From the GL CACM and the GL FCA, it follows that cross-border capacity shall be allocated to the market on a bidding zone border level. KF CGS extends the already existing bidding zone border Denmark 2-Germany/Luxemburg (DK2-DE/LU) formed so far by the HVDC interconnector KONTEK. The bidding zone border DK2-DE/LU is part of the CCR Hansa. Therefore, the calculation of cross-border capacity for the different timeframes (i.e. LT, DA and ID) as well as its allocation to the market will be executed in accordance with the methodologies applicable to the CCR Hansa pursuant to the GL CACM and GL FCA as amended from time to time. The NRAs of the CCR Hansa have approved the CCM for the DA and ID timeframes on 16 December 2018. In 2019 the bidding zone border NL-DK1 was assigned to the CCR Hansa. This requires a new approval of the CCR Hansa CCM for DA and ID timeframes. Due to the ongoing process on the derogation of KF CGS, the Dutch NRA was not prepared to approve the CCR Hansa CCM for the DA and ID timeframes. Therefore, all Hansa NRAs requested an extension of the new approval process until 06 September 2020. This process has also been subject to an extension requested by all Hansa NRAs and granted by ACER, because of the ongoing process on the derogation for KF CGS. Both CCM, the ID/DA CCM as well as the LT CCM, foresee a special treatment for KF CGS.

As envisaged from the beginning of KF CGS, the transmission capacity of KF CGS will primarily be used to transmit the electricity generated by the German and Danish OWFs to their respective national grids. The primary purpose of KF CGS is transporting offshore wind power to consumers. Only the capacity on KF CGS not required for this purpose shall be made available to the market for cross-border electricity trade between Germany and Denmark, while maintaining operational security limits. This is considered the clearly more efficient, safer as well as technically realistic solution as opposed to increasing the capacity of the cables and converters on KF CGS or applying continuous countertrading. Increasing the capacity: Increasing the capacity will require the installation of at least an extension of the existing offshore substation (if technically possible) or potentially a completely new separate offshore substation, which needs to be connected to the onshore grid through new transformers and a new back-to-back station. Further technical questions arise such as that reactive power cannot be compensated at the existing platforms. Furthermore, on the Danish side the onshore grid connection has been suited specifically, including 400 kV grid reinforcements, to a durable maximum infeed of 680 MW, such that an additional infeed of up to 400 MW due to an increase of the cable capacity cannot be ruled out to trigger further grid reinforcements. Such changes would constitute such a fundamental change to the existing installations that the technical studies in relation to voltage control, black-start, etc. that form the basis for the secure operation of the existing KF CGS would have to be at least updated or even done anew. In addition a new permission would become necessary. Taken together, this is considered to entail prohibitively socioeconomic costs, especially since the socioeconomic benefits of increased interconnection at times with significant impact of wind generation on market prices are expected to be very modest. Application of countertrading: The application of countertrading in the scale needed will be very challenging for several reasons. The DK2 bidding zone is small with limited resources for both up and down regulation. With continuous countertrading, the resources will likely be close to fully used for this purpose alone implying that increased reserve procurement can be a consequence. With the ACER decision on pricing of balancing energy (24 January 2020), stating that all manual Frequency Restoration Reserves (mFRR) activations having to be settled by marginal price, the Nordic TSOs are forced to look for other market platforms to activate counter trading, which means it has to be moved to an earlier time frame. This will in DK2 in turn lead to fewer resources for balancing as imbalance netting is not any longer a possibility. Further, it will become very easy to predict when countertrading is needed which will obviously lead to a rise of the prices for upward regulation in DK2 where competition will be limited due to the scarce resource situation and the at times high volumes needed for KF CGS. The wind generation of an OWF cannot be predicted with sufficient accuracy for a period of one month or more. Therefore, the LT capacity calculation will be based on the installed generation capacities of the Danish and German OWFs available during the LT period in question. The first point in time for which capacity calculation is carried out where the wind generation of an OWF can be predicted with sufficient accuracy, is the DA timeframe. Consequently, the capacity calculations for both DA and ID are to be based on most recent wind generation

9 forecasts. The capacity that is not required to transmit the electricity expectedly generated by the OWFs to the respective national grid will be offered to the market. Thus, this will increase the transmission capacity offered to the market on the bidding zone border DK2-DE/LU. The additional transmission capacity will be treated as firm capacity. In the ID timeframe, the transmission capacity to be offered for the remaining hours of the day in question on the bidding zone border DK2-DE/LU will be updated every hour based on the most recent generation forecasts for the Danish and German OWFs respectively, received before the start of the hour. Depending on the outcome of the capacity update, Energinet and 50Hertz will offer additional capacity to the market as it is no longer expected to be needed for transmitting the offshore wind generation to the respective national grid.

3.4. Challenges in the operation of the KF CGS system The VSC back-to-back converter in Bentwisch (BtB) will convert the alternating current (AC) of the Nordic synchronous area into direct current (DC) and directly back to AC, now adapted to the European synchronous area. This conversion is necessary due to the fact that the Danish and German transmission grids are operated in a slightly different phase. An offshore transformer, installed on an extension platform to the Danish offshore platform, will transform the different voltage levels of the German (150 kV) and Danish (220 kV) sea cables. Due to the "N-0" secure radial grid connections of OWFs, the fluctuating wind generation and the weak6 AC system of the KF CGS in terms of voltage it is necessary to avoid an overloading as well as an excess of over- and undervoltage in any part of the KF CGS system. For that purpose, a Master controller for Interconnector Operation (MIO) has been developed to monitor and control the assets of KF CGS and the OWFs’ radial grid connections. The MIO will 1. control the load flow through the BtB in real time, based on both the actual generation of the OWFs and the energy schedules agreed for KF CGS as a result of cross-border electricity trading. 2. adapt the set-point values for the load flow through the BtB in real time, in order to achieve that the actual energy exchange over KF CGS follows as accurately as possible the agreed energy schedule and at the same time to avoid or resolve an overloading of the assets. 3. trigger countertrading in case a congestion occurs on KF CGS and/or on the OWF grid connections due to an underestimation of wind generation (i.e. an forecast error). 4. trigger curtailment the wind generation of the OWFs as a measure of last resort in case countertrading proves to be insufficient or unavailable to remedy an overloading of the assets. 5. adapt the set-point values for voltage and reactive power at the BtB and set targets for the OWFs in real time, in order to keep defined reactive power and voltage limits and thus, to ensure the voltage stability of the assets.

6 “weak” in terms of voltage due to the total length of the entire AC connection of the KF CGS system of >> 200 km, being much longer compared to the distance for a normal break-even between AC and DC (as a rule of thumb) of 100 km.

6. Forecast, at least on an hourly basis, the remaining transmission capacity that in the subsequent hours shall be made available to the market for cross-border electricity trade as it will not be needed for transmitting the wind generation to the onshore grid. The MIO operates the KF CGS system autonomously, however its actions are supervised by operators from 50Hertz and Energinet. If the in-feed from an OWF needs to be adjusted, the OWF operators will have to intervene manually based on a signal received from the MIO. For the calculation of the available DA and ID capacities, wind generation forecasts will be used. If such a forecast underestimates the actual generation leading to too much capacity being offered to, and subsequently used by the market TSOs need to apply countertrading (i.e. downward regulation on one side and upward regulation on the other side of KF CGS). This is done in order to avoid that neither the OWFs nor the market's electricity trades over KF CGS have to be curtailed. Based on the already reached high quality of wind forecasts it is expected, that it will rarely be necessary to countertrade due to an underestimated generation forecast and that the volumes to be countertraded will be limited. Further improving the wind generation forecasts over time will help to reduce both the frequency of countertrading and the amount of electricity that needs to be countertraded. If no derogation for the KF CGS system would be granted countertrading volumes are expected to be considerably higher and countertrade is to be applied more frequently (see 4.5) with technical limitations as shown in 3.3.

4. ASSESSMENT UNDER ARTICLE 64 OF REGULATION (EU) 2019/943

4.1. Legal basis of the derogation

The applicants apply for a derogation for the system KF CGS based on Article 64 of the Regulation (EU) 2019/943.

Article 64 allows for a derogation from Article 14-16 and the related provisions from network codes and guidelines based on the conditions outlined below.

4.2. Right to apply for a derogation The Federal Republic of Germany and the Kingdom of Denmark are competent to apply for a joint derogation under Article 64 because they are the Member States in whose territory the assets of the small connected system KF CGS are located.

4.3. KF CGS as a small connected system KF CGS is a small connected system in line with the definition of point 43 of Article 2 of the Directive (EU) 2019/944. As outlined in the following subchapters, KF CGS fulfils the requirements of a small connected system since it is a system, had a consumption of less than 3000 GWh in 1996 and more than 5% of its annual consumption is obtained through interconnection with other systems.

4.3.1. The KF CGS system

As outlined in chapter 3.2. KF CGS is a system which includes the following assets:

 Two onshore voltage source converters (VSC) – forming a so-called back-to-back converter (BtB) – in Bentwisch (Germany);  The offshore platform extension Kriegers Flak E (DK) and the extension of the platform of the German OWF Baltic 2;  Two HVAC sea cables linking the offshore platform extensions;  The MIO (Master controller for Interconnector Operation); and  The radial connection lines of the OWFs to Denmark and Germany

This system is connected to the transmission systems of Energinet and 50Hertz.

Figure 3: The KF CGS system KF CGS is a system separate from other transmission systems. It is separate from the Danish transmission system of Energinet since it is operated by two TSOs with the help of a separate system operation tool called the MIO. KF CGS is also separate from the German transmission system of 50Hertz because it is operated by two TSOs with the help of the MIO and because it is operated at a different frequency than the rest of the 50Hertz transmission system. These characteristics clearly indicate that KF CGS is a separate system which is shared by the two TSOs 50Hertz and Energinet.

4.3.2 Small connected system KF CGS is a small connected system since it fulfils the requirements from Art. 2(43) of Directive (EU) 2019/944:

 In 1996 KF CGS was not yet in operation. Thus, it had a consumption of less than 3.000 GWh. Also, once in operation, KF CGS will have a consumption of less than 3.000 GWh: Its yearly consumption includes the losses of the grid assets and is estimated to be approx. 90 GWh.  KF CGS, once in operation, will obtain more than 5% of its yearly consumption through its interconnection with the transmission systems of Energinet and 50Hertz.

4.4. Substantial problems for the operation There would be substantial problems for the operation of KF CGS in case no derogation is granted. As described in 3.3., a significant impact on the secure operation of DK2-area cannot be avoided. These problems are very specific to KF CGS and result from the pioneering and unique character of this system as well as the recent changes in the regulatory framework (revised Regulation (EU) 2019/943, revised Directive 2018/2001/EC), after the final investment decision in favour of KF CGS was made in 2016. KF CGS is a technically unique system. The safe operation of this system is quite challenging for various reasons: First, KF CGS contains a more than 200 km long AC connection with intermediate compensation of reactive power at the offshore platforms and a back-to-back converter in Germany which is a unique technical design. Nearly all assets of KF CGS, except minor parts of the back-to-back converter, will be operated under Danish frequency independent of their location. Second, two different voltage levels (220kV and 150kV) are used in one system. This is necessary to operate the system, but leads to further challenges for the operation. In order to enable the operation of this complex system, a special device, the MIO, is used to avoid overloading the different parts of the system as well as for ensuring voltage stability of the relevant grid elements. This device was developed especially for KF CGS and will be used for the first time. The design of the KF CGS system was challenging as the right balance between safe grid operation on the one hand and the maximum use of the assets on the other hand needed to be struck. Besides these unique technical specificities, KF CGS has a pioneering character being acknowledged by the Grant Agreement concluded in 2010 and adjusted in 2015. The financial support covers a substantial part of the investment and is granted for the first system trying to combine radial connections of OWF with an interconnector function for reaching the project goals. KF CGS has been planned and implemented based on a regulatory framework which has been considerably revised recently by the Regulation (EU) 2019/943 and Directive (EU) 2018/2001. The investment decision for KF CGS was taken in 2016 based on the assumption that the OWFs could profit from the principle of priority dispatch based on former Directive 2009/28/EC and was understood to be an integral foundation for the investment decision and was tacitly taken into account by the EU Grant Agreement from 2010 as amended in 2015 as its Annex 1 under 1.1.2 refers to the feasibility study by E-Bridge cited in more detail below. The first discussions of the project started in 2007. The idea behind was to build a combined solution (a combination of radial OWF connections with an interconnector) instead of a separate interconnector in addition to the OWF connections. Based on the assumption of priority access of offshore wind energy from a socio-economic welfare perspective, the 13 combined solution was expected to be more efficient. The limitation of capacity available for the market resulting from the priority access of the OWFs to the combined solution seemed to be acceptable compared to the expected significant reduction of investment costs due to combination of the two investments. In 2010, a feasibility study by E-Bridge was carried out in order to assess whether KF CGS was economically feasible. In this study, the project was assessed based on the assumption that the OWF could profit from priority access to the connection lines-to-shore and only the residual capacity being made available to the market. This is reflected in the following statements from the report:

 “Concerning the benefits the basic assumption is that capacity on the interconnections not expected to be required for transporting wind energy can be made available to the spot market. The utilisation of the transmission lines to/from Kriegers Flak increases with the combined solution at Kriegers Flak when the excess capacity is given to the market.”  “Based on the Directive 2009/28 all countries have priority access to the grid for renewable energy sources.”  “The current German market design related to RES is retained in all scenarios. That includes especially the (unlimited) priority of RES-feed in and RES curtailment allowed only for purposes of system security. (…). Additionally, the cables connecting the wind parks to the mainland are often already used for transporting the electricity produced by the wind parks, so that not much more capacity is available for additional flows from one of the countries’ mainland”. Only by linking both national OWF grid connections to the respective shores, the interconnecting function materialized and could provide the cross-border connection of both transmission systems. However, it must be noted that it was a constitutive precondition for this solution that the onshore connections of the OWFs were operational. In turn, without these onshore connections, there wouldn’t have been the KF CGS. By the time of the investment decision for the other KF CGS assets, both the German OWFs and the connection-lines-to-shore were already in operation and the latter ones had been dimensioned to allow for the transport of the production of the OWF only. Only the additional costs needed on top of the grid connections on both the German and the Danish sides were subject to this investment decision taking the grant provided by the European Commission and covering 48.2% of these investments duly into account. Therefore, the KF CGS and its objective to demonstrate increasing RES integration by utilisation of existing grid connections would not have been realised at all without the assumption of priority access for the OWFs and the Grant Agreement concluded. Moreover, the construction of the KF CGS system was nearly completed and KF CGS already close to operation when the Regulation (EU) 2019/943 came into force on 4 July 2019 and as regards KF CGS changed the regulatory framework fundamentally. Before the revision of the legal framework, the provision of priority access enshrined in Article 16 (2) of the former Directive 2009/28/EC and the provision of cross-border capacity maximisation pursuant to Article 16 (3) and Point 1.7 of the former Regulation (EC) 714/2009 coexisted and their relationship was not clearly defined within the European legal framework. The legal framework did not give any indication how the possible conflict between both legal principles “priority access” and “maximisation of interconnection capacity for cross-border trade” should be resolved in implementing these rules. This allowed for different approaches throughout Europe how to calculate the maximum available capacity. With the entry into force of Regulation (EU) 2019/943 and Directive 2018/2001/EC the scope of interpretation 14 was narrowed down since now Article 12(7) of Regulation (EU) 2019/943 clearly provides that priority dispatch shall not be used as a justification for curtailment of cross-zonal capacities beyond what is provided for in Article 16 of the same Regulation. Up to then in the specific context of KF CGS the provisions of priority access and of the maximisation principle for cross-border trade were conflicting: The principle of priority access could only be fulfilled in case the entire wind production could be transported to shore. This is very specific to KF CGS because here, 100% of the generation transported through the connecting lines to shore is generated from renewable energy sources and could profit from priority access. In almost all other grid areas, this is not the case as both conventional and renewable generation feed in power into the grid. However, in case the wind production is given priority access, the interconnection capacity is reduced in order to avoid overloading of parts of the KF CGS system. There is only one way to solve this legal conflict between the two provisions: Point 1.7. of Regulation (EC) No 714/2009 allows for a reduction of cross-zonal capacity in order to solve congestions inside a TSO’s control area for reasons of cost-effectiveness and the minimisation of negative impacts on the internal market in electricity. In the specific case of KF CGS, this condition could be fulfilled because the KF CGS system has been designed in a way that it minimises costs of the assets and is cost-efficient. With this specific design, TSOs could only fulfil the requirement of priority access in case that the interconnection capacity is reduced in times when it is necessary for the transmission of the wind production. However, this inherent congestion “built” as a consequence of the investment decision for KF CGS inside the system itself (and not occurring in the adjacent TSO grid close to the interconnector, as it may be relevant in other cases and may be overcome by further grid expansion) will have to be tolerated for the complete lifetime of the OWFs. Therefore, the planned operation of KF CGS was in line with the former legal framework, both the Regulation (EC) No. 714/2009 and the Directive 2009/28/EC, before the entry into force of the Regulation 2019/943 and Directive 2018/2001/EC. The new legal provisions change the legal situation fundamentally: Article 12(7) of Regulation (EU) 2019/943 clearly provides that priority dispatch shall not be used as a justification for curtailment of cross-zonal capacities beyond what is provided for in Article 16 of the same Regulation. Furthermore, Article 16(8) then provides that “for borders using a coordinated net-transmission capacity approach, the minimum capacity [available for cross- zonal trade] shall be 70% of the transmission capacity respecting operational security limits after deduction of contingencies”. This change of the legal situation came at a point in time where KF CGS is close to operation and could not be changed anymore. This leads to significant problems for the operation of KF CGS (see below) which can only be overcome by a derogation. Without a derogation significant challenges for the system operation would occur as the system is characterized by 100% intermittent renewables generation, no flexibility options and a high amount of renewables curtailment would become necessary: The system contains with the German OWFs Baltic 1 and 2 and the Danish OWFs only generation which is renewable and intermittent. This leads to quick changes of feed-in pattern, which are challenging to handle for TSOs. Moreover, there is no source of flexibility available within the system to balance this renewable generation. Without a derogation, a substantial amount of renewables curtailment and countertrading would become necessary to avoid overloading of the connection lines on top of the amount necessary for dealing with wind forecast errors to make the capacity firm, additionally allocated to the market. This would lead to severe and

15 significant problems for secure system operation as described in 3.3 which can only be overcome by the requested derogation. In addition, the system cannot be operated without being interconnected to other systems because most of the consumption is obtained through the interconnection and all sources of flexibility including countertrading are only accessible via the connection cables to shore. Without derogation significant amounts of curtailment become necessary and this could lead to higher risks for the secure operation of the system.

4.5. No obstruction of the transition towards renewable energy, energy storage, electro mobility and demand response The requested derogation would not lead to any obstruction to the transition towards renewable energy, energy storage, electro mobility and demand response. Still, the society would profit from the additional capacity given to the market by using the residual capacity of KF CGS. In contrast, the requested derogation could contribute to the transition towards renewable energy as it can reduce the amount of renewables generation curtailed. Based on a first assessment by the TSOs, 50Hertz and Energinet, based on historic data for 2016-2018, between 30 and 572 GWh/year of wind curtailment or countertrade could be expected in case no derogation is granted. The amount of countertrade highly depends on the modelling assumption whether the 70% min-RAM requirement applies per bidding zone border or per interconnector. If applied on each interconnector, which is likely to be the case when flow- based market coupling is applied in CCR Nordic and CCR Core, then the volumes will be in the region of 500 GWh per year.7 Significant need for curtailment or countertrading could impact the transition towards renewable energy, firstly because it affects the amount of renewable energy really used for the electricity supply and secondly because it could reduce the societal and political acceptance of new OWFs which are necessary to achieve the EU 2030 renewables targets. The derogation does not obstruct electro mobility since electro mobility does and will not exist within the KF CGS system. Demand-side response cannot be obstructed either since demand-side response is not feasible within the area as the only consumption within the KF CGS system are grid losses and losses of the OWFs. Storage is not obstructed since it remains possible to combine the OWFs with storage in case this would be beneficial.

7 The lower number is based on the lowest result for this past period assuming that (only) 70% of the transmission capacity over the DK2-DE/LU bidding zone border needs to be reached. The higher number is the result of calculation for this historical period under the assumption that (only) 70% will have to be reached on each interconnector being a critical network element (CNE) in a future flow-based calculation and allocation scheme that may be a consequence or a future integration of the CCR Hansa into the CCR Nordic or CCR Core. Both numbers do not take into account changes of the feed-in pattern compared to the historical period (e.g. changes of weather/wind, higher efficiency of the OWF at lower wind speed).