We are immersed in a process of paradigm change where the energy transition to a sustainable model is no longer an option. To this end, various energy policies have been carried out with greater or lesser success to establish the objectives for the energy future of the country / region.

However, many renewable energy technologies are relatively new and not yet as established as “conventional” power generation technologies. The main mechanisms for the promotion and support of this type of generation have been the Feed-In-Tariff and the Auctions. Mechanisms with the same objective, but with different requirements and consequences.

In this article we do not intend to defend one or the other, although it is important to reflect on the benefits and disadvantages of FITs and Auctions.

The main difference between FIT and the auctions is the mechanism to define “the price”. For FIT, the “regulator” is responsible for formulating the policies that set the price; however, at auctions, is the market that determines the price of the project through competitive tenders among bidders.

The maturity of the technologies are the basis for establishing solid price references on which to establish those policies, and this is not always the case. In this situation, auctions are a good alternative. On the other hand, at auctions there must be enough interest from various developers to attract real competitiveness. If this is not the case, the FIT mechanism apparently is a better choice.

In general, we can establish positive, negative and neutral points for each mechanism as established in the following table:

Source: Own elaboration

Renewables Auction

As the renewable energy sector matures, policies adapt to reflect changing market conditions. The fall in the cost of new technologies, the increasing prevalence of variable renewable energies in the energy system has driven the trend of increasing use of auctions, as policymakers seek to acquire electricity based on renewable energy at the price lower while meeting other objectives. 

Global Overview

According to data from the International Renewable Energy Agency In the 2017-2018 period, around 50 countries used auctions to obtain electricity based on renewable energy. Almost half of the 50 countries had no previous experience in auctions (hereinafter, newcomers); They were probably driven by the reported success of auctions in other markets to achieve low prices. The use of auctions continues to increase, mainly due to its ability to reveal competitive prices and flexibility in its design and its susceptibility to adapt to the specific conditions and objectives of the country.

Most auctions in the 2017 to 2018 renewable energy period still focus on mature generation technologies:

Source: International Renewable Energy Agency

Breakdown of auctions held between January 2017 and December 2018, by region and technology (GW):

Source: International Renewable Energy Agency

Price Trend

While the prices of photovoltaic solar energy continued to fall in 2018, wind power took an interesting turn. Both technologies showed a downward trend in prices from 2010 to 2017, but the decline in the prices of photovoltaic solar energy was more marked, reflecting the greater maturity of on-shore wind technology at the beginning of the period. The average global prices fell from around USD 241 to USD 66 / MWh for photovoltaic solar energy (-73%), while the prices of on-shore wind energy fell from around USD 79 to USD 46 / MWh (-36%) . Between 2017 and 2018, the prices of photovoltaic solar energy continued to fall, although at a slower pace, reaching USD 62 / MWh in 2018.

The following figure illustrates the results of the global average price for the auctions of photovoltaic solar energy and terrestrial wind between January 2010 and December 2018.

Source: International Renewable Energy Agency

What factors determine auction prices?

We can group into the following categories:

  1. country-specific conditions, such as the availability of resources and the costs of finance, land and labor;
  2. the degree of investor confidence (clear objectives, credible misplaced buyers);
  3. other policies related to renewable energy (network policies, priority dispatch, local content standards);
  4. The auction design itself, taking into account the trade-offs between obtaining the lowest price and achieving other objectives

Source: Own elaboration

As we can see, there are many variables that condition the result of an auction. At a given technology, the result can be very different depending on the type of auction and country.

A fair and inclusive transition

While auctions can generate an economically efficient allocation of resources from a competitive market perspective, their results may be less than optimal from other perspectives. For example, they may not produce a diversified panorama of actors or generate the expected shared benefits for a fair and inclusive transition, when these objectives are not integrated into their design. In fact, purely price-focused auctions can lead to geographic grouping, displace small and medium-sized project developers, centralize market power and exclude communities from decision-making processes.

Renewable auctions in SPAIN

With the rush to achieve the goal of 20% of renewable energy by 2020, the PP government designed and launched 3 renewable auctions with successful results:

Source: REE

However, it has already been announced that several of the renewable energy projects winning the auctions will not arrive in time by December 31, 2019 and will lose their guarantees. Sources from the Spanish renewable sector says that there are about 2,000 MW in danger of the 8,000 MW awarded in the 2017 auctions. The reason seems to be the same design of the auctions and the fact that many companies participated without having a enough level of market knowledge. The risks of project execution timing were not well measured. If a solution is not found, it can jeopardize the first great wave of new renewables expected in Spain in the coming years. It is estimated that there could be more than 3,000 megawatts affected by the delays. The promoters will not only lose the license to build these facilities but lose tens of millions of euros in the bank guarantees they presented to guarantee their execution as well.

To all this, the speculation of the agents who want to take advantage of a sector that attracts so much capital is added. Despite the situation of the first three auctions, at the end of April this year there were about 50,000 MW of renewable power with access and connection permits granted, the same amount as the objective set by the Government for the year 2030. There is the clear suspicion that some of the holders of these permits have no real interest in the development and commissioning of the facilities, but in obtaining a benefit with the permits “trading”.

So, we still have an arduous path in this energy transition and we still must refine the mechanisms that will lead us to the ambitious goals that we have set for ourselves. Avoiding speculation in this market is going to be a challenge. The question arises if the result of some auctions with such low prices can be considered real market price from competitive projects or simply a result of speculative engineering in a non-mature market.

Alejandro De Roca | Energy Consultant

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