Auctions for Renewable Energy in the European Union
Questions Requiring further Clarification
The new Energy and Environment State Aid Guidelines of the European Commission require as of 2017 that support for renewable energy projects generally be awarded in a competitive bidding process. Exceptions to this rule are allowed only for small-scale projects, if too few bidders would be eligible, if support levels would increase or if project realisation rates would decrease. In economic theory, calls for tenders, or auctions, are an efficient tool for determining prices. However, the literature draws attention to various prerequisites for a successful tendering process: sufficient competition must be assured, for example, through a sufficient number of bidders as well as by involving small market actors. Since the tendering process brings about additional risks for project developers, the auction design needs to address these risks or else costs may increase significantly. In addition, experience in other countries shows that a significant number of awarded projects may not be realised. Carefully assessing the available options for auction design is thus a central precondition for the cost-efficient expansion of renewable energy. As an increasing number of European Union Member States are considering the implementation of auctions for renewable energy, Agora Energiewende recently invited a group of academics to examine the key conditions for efficient tendering procedures and to reflect on international experience in this area. This paper is the product of this effort. It highlights the most important auction-design features, and identifies critical issues requiring further assessment.
Tendering procedures for renewable energy need to be carefully designed.
The introduction of competitivebidding for a specific renewable-energy technology in a given country needs to be preceded by a thorough analysis of the conditions for successful tendering, including market structure and competition. Specific project characteristics of the various renewable-energy technologies must be considered appropriately in the auction design.
Pilot tenders should be used to enable maximum learning.
Prior to adoption of tendering schemes, multiple design options should be tested in which the prequalification criteria, auction methods, payment options, lotsizes, and locational aspects are varied. Learning and gaining experience is of utmost importance, as poor auction design can increase overall costs or endanger deployment targets.
The most challenging technology for auctions is onshore wind.
Experiences made with auctions for certain technologies (e.g. solar PV) cannot be readily applied to other types of renewable energy. Onshore wind is particularly difficult due to the complexity of project development, including extended project time frames (often over two years), the involvement of multiple permitting authorities and the need for local acceptance.
Inclusion of a variety of actors is a precondition for competition and efficient auction outcomes.
The auction should be designed to facilitate a sufficiently large number of participating actors, as this will minimise strategic behaviour and ensure a level playing field for all actors, thus enabling healthy competition. As renewable deployment often hinges critically on local acceptance, enabling the participation of smaller, decentralised actorsin auctions is important.
Mario Ragwitz, Anne Held, Jenny Winkler, Christoph Maurer, Gustav Resch, Marijke Welisch, Sebastian Busch
Fraunhofer ISI et al. (2014): Auctions for Renewable Energy in the European Union: Questions Requiring further Clarification. Study on behalf of Agora Energiewende.