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- SDE++ basics
- Where SDE++ has worked
- Where SDE++ falls short
- Regulation state 2 and curtailment revenues
- The balancing costs signal
- Forecasting opportunities
- A window for action
Dutch solar park owners are watching their margins erode from multiple sides. Reduced subsidies during negative pricing periods and rising power purchase agreement (PPA) fees, driven by higher balancing costs, are squeezing returns.
Adding to these pressures, recent analysis by energy experts Eelco Rondhuis (PowerField) and Sjak Lomme (Energeia) reveals that the country’s subsidy system contains a fundamental calculation flaw that systematically undercompensates asset owners.
What is going on, and how should solar asset owners respond? Last year, we analyzed the broader economics of renewables. In this article, we unpack how the Dutch subsidy system works, where it succeeds, where it fails, and where opportunities lie.
SDE++ basics
SDE++ – Stimulering Duurzame Energieproductie en Klimaattransitie – is the Netherlands’ primary subsidy scheme for renewable energy projects. Its goal is to support the country’s 2030 target of reducing CO₂ emissions by 55% compared to 1990 levels. The SDE++ is an operating subsidy, meaning it is paid out during the operational lifetime of a project (typically 15 years for wind and solar).
The scheme covers the ‘unprofitable portion’ of renewables by bridging the gap between the market revenues an asset can generate and the revenues it needs to be viable:
Subsidy Amount = Base amount – Correction amount (if positive; otherwise zero)
- The base amount is the cost price of producing renewable energy. It serves as the maximum subsidy you can apply for per unit (e.g., per kWh) and remains fixed for the entire subsidy period.
- The correction amount represents the expected market revenues that solar projects can generate through energy trading, including day-ahead market sales, intraday trading opportunities, participation in the balancing market, and curtailment during periods of negative prices.
To illustrate the mechanism, a solar PV project (≥1 MWp, roof-mounted, net-metering) over 15 years might look like as follows:
- Blue bars: Actual market revenues
- Teal bars: The SDE++ top-up
- Orange line: The base amount, as explained above
- Purple line: The correction amount, as explained above
- Yellow blue line: Subsidy floor
In short, if the purple line is below the orange line, the subsidy fills the gap.
Finally, it is worth mentioning that, in its early design, the SDE still paid subsidies during negative prices. Over time, exceptions have been introduced:
- Projects before 2015: Fully insulated from negative prices.
- 2016–2022: Installations (≥500 kW PV or ≥3 MW wind) lose subsidies during periods of negative prices lasting more than six consecutive hours.
- 2023 onwards: All installations with a capacity of ≥200 kW lose subsidies for every negative day-ahead price.
Where SDE++ has worked
The SDE++ has been highly effective in driving the Netherlands’ renewable energy buildout. For starters, the scheme delivered bankability. With guaranteed cash flows, banks and investors had the confidence to back projects that might otherwise have been considered too risky.
It also offered simplicity. The subsidy provided a clear and predictable path to profitability, allowing developers to focus on execution rather than navigating complex market mechanisms.
As a result, wind and solar capacities expanded rapidly over the past decade, putting the country on a path toward its climate goals.
Where SDE++ falls short
The subsidy has also created structural inefficiencies.
Firstly, it led to market distortions: producers are paid to generate regardless of market conditions. There is little incentive to optimize market timing. Specifically, negative prices are a clear sign of oversupply, yet production continues.
Secondly, the SDE is a one-sided design, not a Contract for Difference (CfD), meaning producers are protected only in one direction. (This is expected to change in 2027.)
Most critically, its calculation leads to overestimated revenues for solar owners. The analysis mentioned at the beginning of this article exposed a fundamental flaw in the SDE++ correction amount calculated by the Netherlands Environmental Assessment Agency (PBL).
The issue lies in how curtailment benefits are evaluated. Here, ‘curtailment’ refers to deliberately shutting down solar panels to avoid negative price exposure or to earn money in the balancing market (this excludes day-ahead or intraday curtailment, also known as reverse curtailment or conditional bidding).
- What PBL includes: The financial benefits of curtailment during negative price periods – curtailment can increase revenues by up to 40%
- What PBL ignores: The associated costs and risks, such as losing subsidies on the electricity not produced, and the risk of shutting down at the wrong time.
The Energeia article estimates that approximately 11% of potential solar production is deliberately curtailed on imbalance. This artificial reduction makes the remaining 89% of production appear significantly more valuable than it actually is.
The authors recommend that PBL should either exclude curtailment effects entirely from its calculations or, if it includes the benefits, account for the associated costs and risks.
To understand this issue further, we examine the mechanics of curtailment profitability—starting with the Dutch market’s distinct feature: regulation state 2.
Regulation state 2 and curtailment revenues
Curtailment strategies generate value through imbalance arbitrage. When asset owners curtail during negative prices, they create a short position in the imbalance market. If imbalance prices settle above day-ahead prices – which often happens during solar oversupply – they profit by buying back cheaper power in real time. This made curtailment an attractive strategy.
The problem is that when many participants pursue the same strategy, they create massive passive imbalances that TenneT must counteract. Within the same program time unit (PTU), TenneT activates balancing power in the opposite direction. This triggers dual pricing – regulation state 2 or control state – which splits the imbalance price to penalize both positive and negative positions.
For traders on the Dutch market, the impact has been notable not only in frequency but also in price spreads. We have covered these effects in our previous articles on cross-market optimization and market impact in short-term power trading.
Consequently, the attractiveness of imbalance management has declined over the past four years. To illustrate this shift, we ran a four-year backtest using a simple rule-based strategy with a strike price of –10 €/MWh. The backtest uses a reasonable forecast based solely on TenneT input data and a basic rule-based decision engine. The analysis shows a steady year-over-year decline in curtailment revenues for solar assets; we observed the same trend for wind.
These results also expose a structural limitation in PBL’s approach: the correction amount is based on last year’s curtailment performance, even though market conditions change from one year to the next.
It is important to note that, while these graphs capture the trend, real-world performance can differ significantly. At Dexter, we use richer input data, advanced predictive methodologies, and decision engines that account for market impact, resulting in much better outcomes.
The balancing costs signal
While the Energeia analysis focuses on PBL’s imbalance curtailment impact, it also reveals that Dutch solar assets are paying €22-23 per MWh in balancing costs in 2024, more than double the curtailment benefit PBL assumes.
We visualized this general pain point using a graph that plots balancing costs against imbalance volume and price, a format inspired by discussions with short-term power traders. On the x-axis is the imbalance volume – whether a portfolio has over- or underforecasted. On the y-axis is the imbalance price – whether the market settled above or below the day-ahead price.
The most damaging combinations appear in the red zones:
- Overforecasting when imbalance prices spike
- Underforecasting when imbalance prices are negative
These ‘wrong-wrong‘ scenarios – where both the forecast error and the market price move against you – account for a disproportionately large share of total losses. The contour lines across the plot (isocost lines) make this intuitive: the further you move into a wrong-wrong area, the faster costs escalate.
In practice, balancing costs are heavily skewed: a small number of extreme events dominate the total. Yet under the SDE++ scheme, the Profile and Imbalance (P&I) factor assumes a generic average for each technology type. It does not capture the distinct imbalance profile of an individual asset or portfolio – especially when curtailment income is overstated, or when regulation state 2 risks can be netted within a diversified portfolio.
Forecasting opportunities
Despite these challenges, the analysis we presented here also reveals a critical strategic opportunity. Instead of waiting for policy adjustments or market corrections, asset owners can capture immediate gains through accurate forecasting.
The balancing cost burden represents exactly the type of inefficiency that advanced forecasting eliminates. By accurately predicting both production and price, sophisticated market players can:
- Reduce balancing costs to near zero through precise day-ahead nominations
- Optimize curtailment timing to maximize benefits while minimizing subsidy loss
- Navigate negative price periods more effectively than competitors
- Maintain operational flexibility as market conditions evolve
A window for action
In conclusion, there is a clear gap between policy assumptions and real-world costs. For renewable asset owners, excessive balancing costs erode the very margins subsidies were meant to protect. For offtakers, they have made traditional PPA structures untenable, forcing many providers to reopen contracts and shift imbalance risks back to producers.
Market changes and corrections are inevitable, but waiting for them means accepting continued underperformance. Proactive market participants who optimize their operations today can increase their returns, even in tough conditions.
At Dexter, we provide forecasts and trading signals to help you optimally trade PV and co-located batteries across relevant markets. Contact our team to discuss how this applies to your portfolio.