RES support tenders – increasing competition or emergency brake?

Renewable energy sources (RES) have played a key role in European policies over the latest decades and will most probably continue to do so in future. To reach their targets for electricity consumed from RES, EU countries have applied a number of support schemes, which often have been revised (in many cases more than once) for one or another reason. As a professional, who has experienced the renewables tariff roller coaster in first person, any announcement of changes is already bad news. Auctions and/or tenders, increasingly gaining popularity within the EU as instruments to increase competition among different renewable technologies, are no exception. A person like me, who has developed a healthy pessimism against frequent subsidy changes caused by the evolution of the support schemes, may ask the following question: Is the urgency to curb the rapid RES development and the associated budget deficits the primary motivation behind the reforms or could it be the next logical step in the evolution of renewable energy support?

According to a recent document published for EU-28, the development of the RES shares constantly exceeded the expected trajectory in the period 2010-2014. This has determined Europe’s leading position in terms of energy investments, which was only recently overtaken by China. Advantageous feed-in tariff levels in Germany, for example, have obviously attracted economic interest for much more installations than originally anticipated, raising the renewable energy levy (EEG-Umlage) in energy consumers’ bills from 0.20 ct/kWh in 2000 to 6.24 ct/kWh in 2014. The rapid growth of RES has caused tariff deficits i.e. a gap between the cost of electricity generation and what consumers pay, in a magnitude of billions in Spain in 2013, leading to significant support reductions, some of which were even applied retroactively. The latter triggered a chain of lawsuits from the business against the state. The value of green certificates (GCs, type of market-based RES support with quota obligations set administratively) in Poland has declined dramatically due to the oversupply of the GCs market. Frequent revisions of subsidies also took place in Italy, Portugal and other countries. Many of these developments I have experienced live by taking part of the risk management and valuation of the assets directly impacted. Besides the loss of value, the loss of trust is a negative consequence of the frequent changes in governing legislation. It discourages the business from further investments. This is, as far as I can tell, a rather harsh reality than a textbook argument. In the context of growing caution by investors, tenders with fixed levels (caps) of support per technology might act as an emergency brake to prevent any potential negative trends before it’s too late.

Typical competitive allocation mechanisms like auctions or tenders are designed to distribute financial support cost effectively by letting the business decides which bid for a particular energy source will be deemed acceptable. Whether the direct consequence of their implementation will be an increase in competition or a decline in renewables growth (both already witnessed in practice), is up to the government tailoring the rules. Too high received bids (e.g. based on perceived as fair feed-in tariffs plus a premium) or too low maximum prices could undermine competition or even lead to non-feasible projects winning the tenders. Such scenario will definitely slow down the current rapid development of RES projects. Certain pre-qualification criteria might prevent cost-effective technologies from bidding. Auctions performed infrequently, irregularly and in an unreliable way might well act as weapons in the hands of regulators, who are looking for quick wins in budget savings. For many RES, subsidy reforms may prove to be a road to Hell paved by good intentions, and for individuals mostly pessimistic about changes in rules – a prove of their attitude. The final verdict will definitely depend on the country specific design of the auctions. So far, Germany seems to be paving the way towards introducing competition by-the-book and reaching the intended results by the EU. Let’s see what the future holds for the others.

References: http://www.eea.europa.eu/publications/renewable-energy-in-europe-2016#tab-news-and-articles

Written by Konstantin Grigorov