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Date: March 2019 | Sector: Energy | Low-carbon technologies | Energy transition & flexibility | Expertise: Public policy

Some lessons from technology-neutral auctions for low-carbon electricity generation

In Europe, technology-neutral tendering procedures for determining the level of support for RES projects have emerged as the preferred scheme in the State Aid Guidelines, as well as in the latest Commission’s proposal for the revision of the Renewable Energy Directive. (1) In 2018 alone, several European Member States have held technology-neutral auctions or are developing such schemes and are expected to hold auctions in 2019. Some EU Member States have implemented or are currently implementing ‘mixed auctions’ for solar and wind combined, which some refer to it as ‘technology-neutral’ auctions, even though the number of eligible technologies is small.

Truly technology-neutral auctions are those that allow any renewable technology to participate, provided they meet specific eligibility criteria (e.g. project size, project maturity, etc.). A prerequisite for technology-neutrality is that renewable technologies compete on a level playing field for support entitlements.

Traditionally, renewable support auctions have been technology-specific. Few, if any, governments are willing to rely on a single technology-neutral scheme to support all RES. The experience of technology-neutral auctions and their outcomes vary across Member States. In this short article, we discuss some of the key lessons to be learnt from various auction schemes across Europe and what policy makers and investors should be wary of in future auction rounds. These are:

  • Whether technologies can truly compete on a level-playing field in a nominally technology-neutral auction;
  • Whether technology-neutral auctions achieve competitive prices over time;
  • The unintended consequences of pre-qualification investment requirements and penalties for pulling out/non-delivery;
  • What could explain the level of under/over subscription for these auctions; and
  • The unintended consequences of a cap on energy or capacity for specific technologies.

How successful have technology-neutral auctions been?

The success of newly introduced low-carbon technology auction schemes can be assessed by:

  • looking at whether the auction has met the initial aim of the scheme; e.g. incentivise project promoters to bid for, develop, construct and commission low-carbon technology projects;
  • whether it encourages the desired behaviour from auction participants, e.g. competitive bidding; and
  • examining the design of the scheme and the potential outcomes it could produce.

In more established technology-neutral auctions, where performance data is available, additional criteria may be applied to measure success. This includes: i) the delivery of lower price per MWh than would have otherwise been achieved without an auction (e.g. in comparison to a previous non-competitive scheme), ii) as well as the delivery of the renewable capacity itself, i.e. realisation rates.

However, there is very limited data on the performance of technology-neutral auctions since some Member States have only fairly recently adopted them. Available evidence is quite varied, suggesting that:

  • countries with such schemes have had varying levels of success;
  • there is a limited experience with such schemes; and finally
  • there is an element of learning-by-doing as countries undertake additional auction rounds and review their auction design as a result.

The main aim of technology-neutral auctions is to attract capacity (MW) or energy (MWh) that meets a country’s stated low-carbon technology targets and that it is then delivered at competitive prices.

Whether renewable technologies truly compete on a level-playing field in a nominally technology-neutral auction is often subject to debate. For example, in some countries only a single technology has been successful in some auction rounds, with auction participants claiming that different low-carbon technologies are at different development stages and cannot compete on price, while in other countries multiple technologies have won contracts and strike prices achieved have been decreasing.

CEPA’s research suggests that most schemes in Europe are successful in achieving competitive prices (on a per MWh basis), and that auction-clearing prices tend to fall between auction rounds, as well as between previous renewables support scheme and the first technology-neutral auction round; this was observed in GB for instance. Yet, in Germany the auction-clearing price achieved in the technology-neutral auction held in April 2018 – awarded to solar projects only – was c.10% higher than the auction-clearing price achieved by technology-specific auction for solar held in February 2018. The price hike is likely to have been a result of lower competitive pressures in the technology-neutral auction (perhaps due to project developers’ unfavourable perception of the scheme), although bidding strategies and participation rules may have also played a role. For example, as part of the bidding process, applications were subject to a charge of €522 for onshore wind bids, and €586 for solar projects. Although the difference between the pre-qualification investment required for each technology is not very large, it is unclear why technologies would be subject to different pre-qualification investment in a technology-neutral auction.

Another aspects Government departments should be wary of is the level of pre-qualification investment required and the associated penalties of backing out. For example, if pre-qualification investment is relatively low, bidders may be encouraged to bid a low price per MWh because the cost of backing out of the auction commitment is relatively low. In GB, a few projects have pulled out after participating in an auction round despite having incurred 4%-8% (as a % of projects costs) pre-qualification costs and facing a non-delivery penalty resulting in them being unable to participate in the next round of auctions. The effect of having even lower hurdles could increase the number of participants backing out after the auction round has been completed.

Another finding worth noting is that technology-neutral auctions tend to be oversubscribed, i.e. they tend to attract considerably more projects than the targeted volume or what the budget cap can allow. This shows that there is substantial interest in the auction process, and that local and international investors are keen to invest. But in GB’s latest Contracts for Difference (CfD) round (2nd round), the budget cap was not reached. This suggests that the auction did not attract as high levels of participation as anticipated by BEIS at the auction round design stage. Similarly, the Dutch 2014 auction did not reach the budget cap. Consequently, the ultimate price was significantly impacted and may have also dulled incentives to participate early in subsequent auctions.

The number of auctions held per year and whether there is a budget/energy/capacity cap on specific technologies also determine the level of competition in each round. For example, in GB's Round 2 of CfDs, a cap was put on “fuelled technologies”. The cap was binding, suggesting that additional projects at competitive prices could have been successful had the cap not been in place. As a result, more expensive wind projects cleared the market, pushing up the strike price raising costs to consumers.

How a technology-neutral auction scheme evolves after each round (iteration) is also critical to the future success of the scheme. Research suggests that there is an element of learning-by-doing in the operation of competitive auction schemes. For example, some countries have modified the auction design following a few auction rounds based on the levels of participation or as a result of concerns around potential bidder collusion. In the 3rd auction round in GB, no capacity maxima or minima will be applied as a result of the unintended consequences of the cap on fuelled technologies in Round 2.

Conclusions

In this short article we have discussed a handful of elements and lessons to be learnt in relation to the design and execution of technology-neutral auctions.

How market participants bid, the level of interest in the auction and the outcome of the auction itself (rules, administrative strike price vs. competitive strike price, etc.) is highly dependent on the design of the technology-neutral auction.

Governments seeking to introduce such auctions, improve their existing auction framework, or extend their framework to more technologies may wish to consider testing their framework prior to conducting their first full auction round to ensure the design and participation rules incentivise the right behaviours and avoid any unintended consequences.

It will be interesting to see how the next technology-neutral auction rounds unfold in different countries and EU Member States and whether any lessons learnt will have been incorporated. As more and more renewable projects become operational under the technology-neutral schemes, additional evidence will become available and for a more holistic assessment of the success or failure of the schemes. If will also be interesting to see whether and how the scope for CfDs in GB would be extended to include other low-carbon technologies such as carbon capture and storage (CCS).

CEPA has done extensive research on technology-neutral auctions in more than 15 countries and follows closely the evolution of such schemes.

Contact us if you would like to know more about technology-neutral auctions.

Sources:

(1) CEER 2018 Tendering procedures for RES in Europe.

To find out more, please contact our experts listed below.

Emmanuella Gentzoglanis
Senior Consultant United Kingdom