Auctioning RE projects: Lessons learned from auction design for renewable electricity

Dr. David Jacobs Managing Director IET – International Energy Transition GmbH Clean Energy Regulators Initiative Webinar Programme Leonardo Energy 7 October 2015

IET – International Energy Transition

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Dr. David Jacobs o Founder and director of IET o 10+ years experience in renewable energy policies o 50+ publications on energy and climate o PhD in renewable energy policies o Lecturer on energy and climate issues at FU Berlin

o Focus on sustainable energy policy and market design

o Consulting and presentations in 30+ countries around the world

o Clients: IRENA, UNEP, BMWi, IEA-RETD, World Bank, OSCE, Ka-Care, etc.

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RE Auctions world wide

• RE auctions: from 7 countries in 2005 to 60 countries in 2015

Source: IRENA 2015, REN21 2005, REN21 2015

Designing auctions: Key questions for policymakers

Key questions when designing auctions of RE

1. What is being auctioned and when? (Procurement schedule)

2. Who can participate in auctions? (Pre-qualifications) 3. On what basis are bid evaluated? (selection criteria) 4. What mechanisms is used for price determination? (Price-finding

mechanism) 5. What payment will winners receive? (payment modalities) 6. How can I assure that projects will actually get built? (Penalties for

none-compliance)

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Procurement schedule: What is being auctioned and when?

• Scale of auction (MW)?

• Technology neutral versus technology-specific auctions? • Frequency of auction rounds?

• Upper or lower limit on project size?

• Upper or lower limit on prices?

Procurement schedule

Pre-qualifications: Who can participate in auctions?

• Prequalification requirements for auctions – important for project realization rate!

Pre-qualifications

Material pre-qualifications Financial pre-qualifications

Grid access and connection Bid bonds Securitization of land Demonstrate financial strength

Contracts for equipment Project finance track-record

Permits

Selection criteria: On what basis are bids evaluated?

• Lowest bids/prices

• Primary objective of auctions

• Lowest bids/prices plus X

• Additional selection criteria usually reflect additional

policy objectives:

• Job creation

• Local content

• Locational incentives

• Etc.

Selection criteria

Payment modalities: What payment will winners receive?

• Pay-as-bid

• Minimize costs

• Take resource variations into account

• Marginal cost payment

• Same price for all winners (highest cost winner determines

price)

• Avoid “winner’s curse”

Payment modalities

Price-finding mechanism: What mechanisms is used for price determination?

• Sealed-bid auctions

• Simple design – ceiling price?

• Each bidder writes down a single bid which is not disclosed

to other bidders and the most competitive bidders win

(“pay as bid”).

• Decending-clock (Dutch auction)

• Multi-round bid

• Auctioner starts with a high price and then calls out successively

lower prices until quantity offered and quantity required match!

• Hybrid design

Price-finding mechanism

Descending Clock Auction Dynamics

Auction clearing price

Source: Author based on Maurer and Borroso 2011

Penalties for none-compliance: How can I assure that projects will actually get built?

• Penalties for failure to fulfil awarded contracts

• No (or only partial) payback of bid bonds or construction

bonds; Completion bonds

• Reduction of tariff payment levels/payment period

• Exclusion from next auction round

• Define maximum lead times

Penalities for none-compliance

Summary: Advantages and disadvantages

Pros and cons of auction mechanisms

Advantages Disadvantages Cost efficiency and price competition High administrative costs (complexity)

High investor security (PPA) Discontinuous market development (stop-and-go cycles)

Volume and budget control risks of not winning project increases finance costs

Predictability of RE-based electricity supply (sector growth)

Risk of underbidding (lack of deployment and target achievement)

Combination with other policy objectives, e.g. local content, etc.

Exclusion of small-scale actors

Auctions and feed-in tariffs: Mutually exclusive or complementary?

• What is being auctioned? • Frequently fixed price contracts (payments per kWh)!!

• In this case, the major difference between FITs and auctions is the

price-discovery mechanism: • Administratively fixed prices (FITs) • Price determination via competitive bidding (auctions)

Auctions versus FITs?

• Do you have experience in setting prices administratively?

• Is there sufficient interest in investing in renewables in your country (competition in Least Developed Countries)?

• Is the market big enough to create competition (size of auction; schedule for auctions)?

• Which type of actors should invest (small vs. big)?

Auctions or FITs: No easy answer…

• Move from FITs to auctions

• Use auctions to determine FIT prices • Use auctions for emerging technologies and FITs for mature

technologies

• Use auctions for large projects and FITs for small projects

Combining FITs and auctions

• Specific auction design for smaller actors?

• Funds for the project development stage

• Lower prequalification criteria for small scale actors (bid bonds)

• Use auction results to determine fixed prices for certain

investor groups?

Auctions design for small-scale actors

Further reading – combining support mechanisms

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• Next Generation of Renewable Electricity Policy o How rapid change is breaking

down conventional policy categories

o http://www.nrel.gov/docs/fy15osti/63149.pdf

Further reading on auction design

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• IRENA and CEM (2015), Renewable Energy Auctions – A Guide to Design

• GIZ (2015): Renewable energy auctions. Goal-oriented policy design.

• World Bank (2013), Promoting Renewable Energy through Auctions: The Case of China, Brazil,

South Africa

• del Río, P. and P. Linares (2014). "Back to the future? Rethinking auctions for renewable

electricity support." Renewable and Sustainable Energy Reviews 35(0): 42-56.

• PPIAF (2014), South Africa’s Renewable Energy IPP Procurement Program: Success Factors and

Lessons, May 2014. World Bank Group.

• Ecofys et al. (2015), Designing renewable energy tenders for Germany, Executive summary of

recommendations.

• Maurer, L. T. A. and L. A. Barroso (2011). Electricity auctions: An overview of efficient practices.

Washington, DC, World Bank, Energy Sector Management Assistance Program.

Dr. David Jacobs Founder and Director IET – International Energy Transition GmbH Phone: +49 163 233 90 46 E-mail: jacobs@iet-consulting.com Twitter: @InterEnerTrans

Thanks for your attention!