Renewable Energy Supply auctions … the future? Vienna Forum on European Energy Law
13 March 2015
What is a renewable supply auction A competitive bidding process
Renewable energy suppliers bid for either •
the sale of renewable energy supplies
•
a renewable subsidy
The lowest bidders are cleared (and receive a contract)
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● Why auctions? ● How to design auctions? ● What is the experience?
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Good economic arguments for auctions … Ability to define a standard product
Attract multiple suppliers
Uncertainty over “true” cost
Effectiveness
Cost efficiency
Transparency
● Policy makers can control how much RES capacity/generation is supported
● Productive efficiency
● Auctions are a transparent way to determine support levels for renewables
● Where desired it also controls which technology is built
□
Competition within technology – cheapest projects succeed
□
Competition between technologies – only cheapest technologies win
● Allocative efficiency – competitive pressures on prices/support levels to reflect efficient cost
● Final customers who pay the bill better understand where money is spent
… achieving policy objectives at low cost for consumers 4
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… but also legal requirements Direct marketing obligation (from 1 Jan 2016) Competitive Bidding process to determine the level of support premium (operating aid)
New capacities
(124, 125)
● Most capacities > 500kW ● Wind > 3MW (126) ● clear, transparent and nondiscriminatory criteria ● Assumption of proportionality of aid in case of technology neutrality ● …but several exceptions from above conditions allowed
Guidelines increasingly require competitive tenders
(126, 127)
Transition timings to introduce competitive bidding Some discretion for member states
● in 2015-2016 – 5% of all new capacities ● From 2017 – all new capacities □ □
Wind: > 6 MW Other technologies: > 1 MW
● Type of aid: investment or operating aid ● Pre-qualification criteria for bidders
But Guidelines leave room – exceptions allowed and no need to change legacy regimes
… the EC pushes towards RES auctions through its State Aid guidelines 5
Guidelines on State aid for environmental protection and energy 2014-2020 (2014/C 200/01)
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… but there is criticism as well Issue
Effectiveness
● International experience suggests not all contracted capacity is built
Cost efficiency
● Auctions imply more commercial risks for RES suppliers and thereby higher financing cost
Practicability
● RES auctions are very complex to design
Diversity of bidders
● Competition will crowd out smaller/less experienced players
Evaluation ● Probably one of the biggest challenges for auctions
?
● Advances in auction design help improve effectiveness ● … but important to signal that RES is capital intensive ● Overall competition tends to lower cost ● Agreed, but experience is growing internationally ● Given other benefits this complexity is acceptable ● YES. That is the nature of competition. Only the best survive. Player diversity is no energy policy objective itself
… auctions are good, but not perfect! 6
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● Why auctions? ● How to design auctions? ● What is the experience?
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A decision process for auction design
See criticism of auctions above 1
2
Understand the challenges
3
Consider the design options
Evaluate the design options
Define criteria and evaluate the expected performance of options in relation to criteria
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Key dimensions of auction design 1 Prequalification
● Technical qualifications (e.g. required planning permissions) ● Securities/ guarantees/deposits by bidders
Lead time
● Lead time between auction and commissioning/start of support ● Fixed or latest start of support
Product definition
● ● ● ● ●
Demand side
● Frequency of auction and volume per auction ● Price inelastic vs. elastic tender volume
Other contract terms
● Penalties and securities/deposits in case of contract award ● Permission for secondary trades
Type of auction
● ● ● ●
2 3
4
5
6
9
Technology neutral vs. specific Capacity vs. Energy (or mixture) Contract duration [years] Limits on support (e.g. max amount per year or over full life-time) Investment obligation or option
Open (descending/ascending), sealed bid or hybrids Pay as bid/as cleared Min/max prices Bid size
Further detailed bidding rules also to be considered (e.g. activation rules, bid increment, etc.) Frontier Economics
● Why auctions? ● How to design auctions? ● What is the experience?
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Auctions are widely used in infrastructure sectors … ... across sectors ● Financial markets □
Auctioning of gov‘t bonds
● Telecoms □
...and also to support RES ● Used in over 40* countries to determine the level of renewable support ● Brazil, California and South Africa count as particular successes**
Spectrum auctions
● Energy □
Spot and forward trades at various power exchanges
□
EU CO2-emission certificates
□
Exploration rights for gas and oil
RES auctions already applied RES auctions planned
… and now also to procure renewables 11
*Source: REN21, Renewables Global Status Report, 2014 and own research (the map is not aimed at providing comprehensive coverage); **In South Africa from the second auction.
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International experience confirms the importance of a good auction design
Technology
RES support scheme
Product
Auction design
Bidder qualification
Lead time [years] Support term
Lesson
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DK
NL
UK
(2004 – 2010)
(2010)
(1990-1998)
ZA (2011*)
FR (seit 2011)
Offshore Wind (in defined location)
Offshore Wind
Various (auction specific by technology)
Various (auction specific by technology)
Solar PV (auction specific by technology and size)
Direct marketing obligation with “floating” market premium (MP)
Direct marketing obligation with “floating” market premium (with Cap on MP)
Feed-in tariff
Feed-in tariff
Feed-in tariff
Energy
Energy
Capacity
Energy
Capacity
First price auction
Multi criteria bidding (main criterion: price)
„pay-as-bid“
Environmental Impact Assessment; Financial guarantee + penalty threat
Planning permission; financial guarantee
ca. 3
5
Volume limit
15 years, annual volume limit
Threat of high penalty deters investors
Small design changes significantly affect outcomes
„pay-as-bid sealed-bid“ „pay-as-bid sealed-bid“ with some scoring with some scoring
Feasibility study
Several conditions; Financial guarantee
Financial deposit, planning permission, financial guarantees, etc.
5 (from 3rd round)
2-3
1.5
20 years
20 years
Technology specific volumes can be significant driver of the outturn price
Intransparencies and short lead times may reduce competition
8 years (round 1, 2) 15 years (round 3, 4) Lack of penalty lead to low realisation rate (ca 30%)
*Further auctions in SA with refined auction rules in 2012 und 2014 proved more successful.
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Key dimensions of GB auction design
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Type of auction
● ● ● ●
Lead time
● 1 to 4 years
Strike price in CfD is bid parameter Single, sealed bid Pay as clear max prices
Product definition
● Technology distinction between “pots” of established and less established technology ● CfD (related to market prices with volume according to actual production in any hour) ● 15 years contract duration
Other terms
● Penalty for not performing: exclusion of the site from future auctions) ● Penalty for delay: up to 12 months, the bidder loses remaining time of CfD; after 24 months delay, CfD lapses
Demand side
● Auction value limited per pot
•
Auctions are for a multiyear period – bidders can submit bids for the same project in multiple years and at multiple sizes (to help avoid the risk of bidding in a year / for a size that exceeds budget)
•
Budget caps apply across all years (once a project accepted, has ongoing impact on future years!)
•
Administrative strike price sets a cap in the auction (ASPs decline over time)
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The prices achieved in the auction were well below the “price cap” (and prices previously paid by DECC) Offshore wind 700 600
Clearing price (LH axis)
70
Volume (RH axis)
500
60
Price cap (LH axis)
400
50 40
300
30
200 100
10
700
140
Clearing price (LH axis)
120
Volume (RH axis)
600 500
100
400 80
300
2015/16
2016/17
2017/18
60
100
50 Clearing price (LH axis) Volume (RH axis) ASP (LH axis)
80
40
60
30
40
20
20
10 0
0 2015/16
2016/17
2017/18
2018/19
MW
120
20
100 0 2016/17
2017/18
2018/19
● Major reductions in price relative to administered cap – particularly valuable in the case of offshore wind given the volumes purchased
Solar 70
200
2015/16
2018/19
140
40
0
0
0
£/MWh
160
60
20
14
800
Price cap (LH axis)
£/MWh
80
MW
£/MWh
90
180
MW
Onshore wind 100
● In last process, government bought 3,184MW offshore wind at administered strike price – had it been possible to procure this quantity at the lower auction clearing price, saving would have been around £350m pa ● Solar prices difficult to interpret – not easy to see how developers will be able to proceed (if they do not sign contracts, those companies are excluded from future auctions) Frontier Economics
Conclusions
Why auctions? Auctions are an effective and a cost efficient means to implementing RES support
Auctions are also required under EU State Aid law
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How to design auctions?
But there are significant challenges in designing auctions – need to get it right
What is the experience?
Experiences exist from around the world and most recently from the UK •
Lower than anticipated prices
•
… but to be seen how much capacity will ultimately be built
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Frontier Economics Limited in Europe is a member of the Frontier Economics network, which consists of separate companies based in Europe (Brussels, Cologne, London and Madrid) and Australia (Melbourne & Sydney). The companies are independently owned, and legal commitments entered into by any one company do not impose any obligations on other companies in the network. All views expressed in this document are the views of Frontier Economics Limited. 17
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