Designing RES auctions well: International experiences and lessons learnt

Designing RES auctions wellInternational experiences and lessons

learnt

by Silvana Tiedemann

08 September 2016

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> Supporting the design – clients amongst others:

– The Federal Ministry for Economic Affairs and Energy

– The Grand-Duchy of Luxembourg, Ministry of Economics

> Analysing international experiences and lessons learnt

– Project: AURES (AUctions for Renewable Energy Support)

– Clients: International Renewable Energy Agency (IRENA), European

Commission, Deutsche Gesellschaft für Internationale

Zusammenarbeit (GIZ), MVV Energie

> Impact on business models and strategies to win auctions

– European industry association

– Large utility active in European markets

– Trainings

Ecofys has a strong track record on RES auctions

08/09/2016 Silvana Tiedemann2

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Introduction

> Definition:

– An auction is a competitive allocation mechanism for RES support

– A tender is a procurement process which may include an auction

– In practice, the terms tender and auction are often used interchangeably

> Content of the presentation:

1. The renaissance of RES auctions

2. Design elements

3. Design challenges

4. Auctions from a bidder’s perspective

3 08/09/2016 Silvana Tiedemann

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1. The renaissance of RES auctions

08/09/2016 Silvana Tiedemann

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> In 2005, only six countries had introduced auctions for RES support

> Within ten years, the number increase tenfold

An international trend to introduce RES auctions exists


Source: IRENA 2015: Renewable Energy Auctions: A guide to design

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> Other European countries with RES auctions: Denmark, Poland, Spain,

France, Greece

Many European countries introduced auctions

Name of support scheme Since Recent policy developments

UK Contracts for Difference

(CfD)

2014 • By 2017 CfD will become the only support

scheme for RES

• Additional budget for offshore announced

NL Stimulering Duurzame

Energie (SDE+)

2011 • Budget increase for SDE+ in 2016

• First offshore auctions took place in summer

2016 for predeveloped sites

DE PV-Freiflächen-Verordnung/

Erneuerbare Energien

Gesetz 2017 (Renewable

Energy Act)

2015/

2017

• Ground-mounted PV auction running

• Auction design for wind onshore, offshore

and PV roof-top adopted with EEG 2017law

• Agreement with Denmark to conduct joined

auctions.

IT Referred to as DM 06/07/12

(Ministerial Decree 6 July

2012)

2012 • Extension of scheme by one year

• Uncertainty over post 2016 outlook


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The European State Aid Guidelines require Member States

to introduce auctions

> State Aid Guidelines for Environmental Protection and Energy 2014-2020:

– Competitive bidding mechanisms shall become default to allocate RES

support by 2017!

– 2015/16: At least 5% of new RES capacity shall be auctioned

– The guidelines apply to all support schemes that need state aid clearance

> State Aid Guidelines for Environmental Protection and Energy 2014-2020 available at:

http://ec.europa.eu/competition/sectors/energy/legislation_en.html


http://ec.europa.eu/competition/sectors/energy/legislation_en.html

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Advantages of competitive bidding explain the

renaissance of RES auctions, yet challenges arise

> Control of maximum volume and

support cost

> Support level is determined by the

market, not the administration (market

exposure and information generation)

> Competition between RES-E producers

may lower prices (compared to

administrative FIT/FIPs)

> Real-cost discovery

Opportunities

> Challenge of ensuring high realisation

rates/target fulfilment

> Higher risk for RES-E producers than

administrative FIT/FIP, challenging

particularly for smaller actors

> Common value problems, uncertainty

over project cost, and unexperienced

bidders lead to “winner’s curse”

> Risk of strategic behaviour (collusion)

leading to higher prices and support

costs

Challenges


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1. Design elements


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Auctions differ in design – many parameters exist

> The choice of design elements influence the auction procedure.

> This slide does not show which elements have the highest impact on the

acution'‘s outcome, effectiveness and efficiency.

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Grouping of technologies Timing of the auction (early/late)

Specificqualificationcriteria

Realisation period

PenaltiesVolume

High Impact on auction design Low

Auctioned and remunerated item (e.g. kWh or KW)

Mutli vs. single-item auction

Less mature

Firm RESMature

Technology-neutral

Windon-

shore

Windoff-

shore

Ground-ount.

PV

Roof-top PV

Bio-mass

…

Evaluation criteriaPrice-only vs. multi-criterion Specific criteria for multi-criterion

Ceiling priceMethodology Value

Pricing rule

Procedure: Dynamic vs. static

Min. frequency Rounds per year

De-Minimise-Rules

Qualification criteria and bid bonds


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Countries rather introduce technology-specific or multi-

technology than technology-neutral auctions.

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Less mature

Firm RES

Mature One pot

Windoffshore

Ground-mounted

PV

Windonshore

Biomass

Technology neutral ----------------Grouped --------------- Technology specific

Roof-top PV

…

UK NL IT DE

Grouped One pot with technology specific elements+ offshore specific auctions

Technology specific

Technology specific; Grouped pilotauctions planned


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Single- and multi-item auctions work fundamentally

different

> Single-item (side-specific) auctions

> Observed for large technologies

with restricted availability of

locations, particularly offshore

> Multiple-item auction

> Observed for smaller technologies

with many actors, particularly solar

and wind onshore

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Auctioneditem

Bidder 1

Bidder 2

Bidder 3

Bidder 4

Bidder 1

Bidder 2 Bidder 3

Auctioned item

UK NL IT DE

Multiple Multiple except offshore

Multiple Multiple except offshore


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The selected procedure differentiates auctions from each other, yet

both static and dynamic auction can work smoothly

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Phase 1 2 3

RemunerationCent/kWh

Cumulativespending

Availablebudget

Static auction

Volumein MW

Remunerationin €/kWh

Auctioned volume

Dynamic auction

UK NL IT DE

Static, sealed bid

Dynamic (ascending clock)

Static, sealed bid, degression from max. price

Static, sealed bid


Successful bids

Unsuccessful bids

Successful bids

Unsuccessful bids

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Rules regarding eligible and awarded prices differ.

> Pay-as-bid price rule: each bidder receives the price he/she offered (Px)

> Pay-as-cleared (uniform) price rule: each bidder receives the clearing price

(Pmax)

14

UK NL IT DE

Evaluation criteria

Price Price & timing of application

Price (auction), quality (registry)

Price

Price rule Uniform bydelivery year

Uniform by phase

Pay-as-bid (auction), fixed tariff (registry)

Pay-as-bid (during pilot also uniform)

Max./Min price Max. price Max. price Max. & min. price Max. price


X

Auctioned volume

Puniform

Ppay-as-bid

Awarded bids

Non awarded bids

Additional rent

Volume in MW

Support in

€/kWh

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+

The timing of the auction is crucial

> The project risk (left) and the actor composition (right) differ along the

project cycle.

> Small actors are worse positioned to mitigate risk.

> Strict requirements and tight deadlines increase cost and risk.

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Preliminaryplanning

Project planning

Permittingprocedure

Construction

Operation

Formal requirements

AUCTION

REALISATION DEADLINE Planning

Approval process

Construc-tion

Com-missioning

Project

developers

AUCTIONOPTION 1

AUCTIONOPTION 2

AUCTIONOPTION 3

Others

Local cooperatives,citizen organisations

Project risk Actor composition

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Operation

The regulator decides on the timing of the auction by

defining qualification requirements

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Site selection

Early auction Realisation

- Sunk costs- Prohibitive barrier for

(some) bidders

- Risk for bidders increases

- Prohibitive barrier for (some) bidders

+ Incentive to realize due to penalties

Qualification requirements & bid bonds

Penalties

PermittingFinancing /Building

Lateauction


+ Selection of projects with sufficient progress in planning

+ „serious“ bids

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Many countries introduced „late auctions“ and punish

delays or non-realisation

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UK NL IT DE

Timing andqualifi-cation

Late (planning consent, connection agreement)

Late (permits, proof of ownership,feasibility study for projects >0.5 MW)

Late (building permission/ concession, a connection offer)

Early for PV (early stages ofpermitting); late for wind onshore (building permission)

Moni-toring & penalty

Exclusion from further rounds, contract penalty once CfD signed, monitoring of milestones

Exclusion of project from SDE+ for three years and penalty for projects >€400M

Penalty for non-realizationand delay (reduced support)

Penalty for non-realization and for delay (PV: 50€/kW, wind onshore: 30€/kW)


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If too many restrictions are included, the number of bids

and level of competition is reduced

> Support levels can rise through insufficient levels of competition

Auctioned volume

Pmax old

Pmax new

Insufficient valid bids

Reasons for expulsion:

Bid too expensive

Wrong project size

Qualification requirements not met

Awarded bids

Non-awareded bids

Volume in MW

Supportin €/kWh


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3. Design challenges


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Policy challenge: Conflicting and implicit policy goals

influence the design

> Aim:

– Political acceptance

> Problem I: Trade-off between effectiveness and efficiency

– Effectiveness: Volume control and target fulfilment through high

realization rates without delays

– Efficiency: Competitive setting of support level through sufficient levels

competition, low transaction costs and minimization of other risks

> Problem II: Policy-makers often attempt to contain the impact of price-

based auctions on further goals:

– Ensuring access of small actors to the auction

– Ensuring a regional distribution of awarded projects

– Ensuring that awarded projects have a local socio-economic impact


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Policy solution: To design an auction well, consider more

than just design elements as important

Target definition

Market analysis

Auction design

Imple-mentation phase

Auction volume

Auction object

Type ofremuneration

Eligible sites

Qualification requirements

Penalties

Type of auction

Price rule

Min/max price

Auction cycle

Etc.

Volume control

Target volume and trajectory

Cost-reduction

Technologies

Other policy goals

Market size

Level of competition

Type and number of market players

Project cycles

Main project risks and cost

Legal implementation

Evaluation

Adjustment of auction design


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Effectiveness challenge and solution: Ensuring high

realization rates while keeping bidders’ risks manageable

> Aim:

– Target fulfilment and political acceptance

> Problem: Threat of non-realization or delay

– NL: High realisation rates for wind onshore and PV (80-100%), low for

geothermal (30%)

– UK: Instances of underbidding for solar, contracts not signed

– IT: insufficient level of participation and delays (wind round 2: 50%

realized on time, 25% delayed (realization ongoing)

– DE: realization rather late but so far within realization period

> Measures to improve the realization rate

– Qualification requirements were tightened in NL and UK

– More reliable securities for penalties introduced in the IT

> No-regret:

Select qualification criteria and penalties to balance quality of bid and

bidders’ risks


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Efficiency challenge and solution: An efficient auction

requires a sufficient level of competition

> Aim:

– Ensure efficient allocation of resources

> Problems:

– A mismatch between auctioned volume and demand

– Transaction costs increase risk premiums and create entry barriers

– Risk of crowding-out small actors/market concentration

– (Wrong) expectation of competition reflected in prices

> Different measures to ensure efficiency of auctions:

– Grouping technologies to increase available volume in the market and

reduce demand fluctuation

– Early auction to ease participation barriers

– Eliminate unproductive risk

> No-regret:

Transparent, easy and non-discriminatory auction schemes


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Diversity challenge and solution: Make sure that auctions

are open and fair for all marked actors

> Aim:

– Ensure competition and political acceptance

> Problem:

– Small actors can be crowded out

> Measures to protect certain actors:

– Easy access

– Bonus or quota

– Preferential treatment (DE)

– multi-criteria (IT)

– Exemptions from auction (FR, IT, UK, DE)

> No-regret:

Transparent and inclusive policy design process


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4. Auctions from a bidder’s perspective


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A project needs to be competitive to win

> A project is competitive if it has a significant advantage in factors that

matter.

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Volume in MW

Px

WACC

Resourc

e

Land lease

turb

ine

Awarded bids

Non awarded bids

x


Supportin €/kWh

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Cost, risk and information on competitors influence the

bidding strategy

Support in €/kWh

LCOEx

= Pmin

Px

Risk aversion

The bid has to be at or above

the LCOE of a project.

High support level

High risk for being unsuccessful

Source: Ecofys, based on Takon 2016

• Available volume on the market

• LCOE of competing projects

• Risk aversion of competitors

• Knowledge of competitors on market


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Lessons learnt I

> The designs of the analysed auction schemes differ, both between countries

and – where technology specific schemes exist – within countries.

> Factors impacting the auction design include among others:

– Maturity of the technology

– Maturity and composition of the market

– Political goals

> There is no “one size fits all” auction scheme.


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Lessons learnt II

> No-regret options to design auctions well:

– Analyse, understand and integrate policy goals in the design process.

– Select qualification criteria and penalties to balance quality of bid and

bidders’ risks.

– Transparent, easy and non-discriminatory auction schemes increase

the level of competition and therefore the efficiency.

– A transparent and inclusive policy design process increases the

acceptance and leads to a better support scheme.

> From a bidder’s perspective, information becomes more important.


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Thank you!

> For further information or in case of questions, please contact us:

Silvana Tiedemann Fabian Wigand Corinna Klessmann

[email protected] [email protected] [email protected]

> For Spanish inquiries contact Ana Amazo: [email protected]


mailto:[email protected]




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