Why there is so much aggressive bidding at renewables auctions – and what the risks are

solar power in Singapore

Renewable energy auctions have seen very low prices in many parts of the world. Why do auctions seem to be so effective in driving down costs – and what are the risks? Ana Amazo-Blanco, Silvana Tiedemann of Navigant[1], and Dr. Stephen Tay and Monika Bieri of SERIS looked at a solar PV rooftop auction in Singapore and an offshore wind auction in Germany to discover the key factors behind the bids and suggest how project developers can make sure the projects are realized successfully.

Renewable electricity auctions have seen record low prices for solar and offshore wind energy  in places like Saudi Arabia, India, Mexico, Germany, and the Netherlands. What are the reasons behind this aggressive bidding? And what could be the risks? To find out, we have looked at two recent cases in Germany and Singapore.

Germany’s offshore subsidy scheme

The German Network Agency held the first round of the offshore wind auction we looked at in April 2017. It produced a near subsidy-free result. Three out of the four awarded projects, which have a total capacity of 1,490 MW, will be built without subsidies, i.e. had a bid price of zero cent/kWh. The projects in question are the 900 MW He Dreiht site that EnBW will develop and the 240 MW OWP West and 240 MW Borkum Riffgrund West II sites, which Ørsted (formerly “DONG Energy”) will build.

The possibility to recover incurred costs by winning the auctions was arguably an important consideration in the applied bidding str­ategies

The second round of the auction, implemented in April 2018, also saw subsidy-free bids being awarded. One of these projects is the 420 MW Borkum Riffgrund West 1 project to be developed by Ørsted. Higher bids were awarded at this auction for three reasons.

First,  projects from the Baltic Sea were protected against competition from more competitive projects from the North Sea by the so-called “Baltic Sea” quota of 500 MW.

Second, a skilful bidding strategy allowed Ørsted to secure a bid with a relatively low volume but high price “filling up” of the remaining volume difference (Ørsted’s second successful bid was Gode Wind 4 with a capacity of 131.75 MW at a price of EUR 98.30 per MWh). Third, the least expensive projects had already been awarded in the first round of the auction.[2].

Both rounds of the auction were open to bidders that had invested in developing their site first. Therefore, if bidders were not successful in the auction, the predevelopment cost would largely have been lost. The possibility to recover incurred costs by winning the auctions was arguably an important consideration in the applied bidding str­ategies.

But do projects that bid zero get no remuneration at all? No, they receive the revenue from the electricity market but without any subsidy.

This is an even more compelling reason why the German offshore market structure invites aggressive bidding for offshore windfarm operators. Winning the auction is the only way to become eligible for a grid connection and thus gain access to the wholesale electricity market.

Singapore’s SolarNova programme

In Singapore, renewable auctions were introduced to grow the private solar sector, decrease carbon emissions, and reduce reliance on imported fuels. The SolarNova programme, led by the Singapore Economic Development Board, was launched in 2014. Its particular target is to achieve 350 MW of installed photovoltaic capacity on the rooftops of government-owned buildings by 2020. In the programme, the aggregate demand for solar energy is auctioned in public bids, which allows government agencies to benefit from economies of scale.

Winning the auction also provides these companies with renewable energy certificates RECs) they can sell to interested multinational corporations

The first auction was awarded to Sunseap Group in December 2015 (with a plan to install 76 MWp), while the second round was won by Million Lighting in June 2017 (minimum installed capacity 40 MWp).

The award decision was mainly based on the discount bidders’ offer against an electricity benchmark tariff. A total of nine bidders offered discounts ranging from 30% to 99.9% for public housing blocks and from 20% to 65% for buildings owned by government agencies. At the second auction, the same number of bidders offered discounts from 10% to 99.9% and from 20% to 90%, respectively.

Against the current prevailing electricity tariffs of S$215.60/MWh (approximately €135.56/MWh) for public housing blocks and S$186.60/MWh (approximately €117.30/MWh) for agency buildings [3],  the winning company for the first tender, Sunseap Group, provided discounts of 99.9% for public housing blocks and 65% for agencies.

This results in public housing blocks receiving virtually free onsite solar power, while agency buildings pay for consumption of power at a highly discounted rate. The solar power generated on public housing blocks, however, can only be used to power common loads such as corridor lighting, elevators, or water pumps and is not allowed to be channelled (or sold) directly to the residential units.

In Singapore, winning an auction enables a company to position itself as a leader in the local market just because of the sheer size of the tender

The aggressive bidding at these auctions was made possible through other income sources the winning parties could rely on. With payments for electricity consumed onsite only providing a small (or no) contribution to revenue streams, bidders have two more options for income and cash flows.

First, winning companies can sell electricity that the respective building does not consume back to the grid. For the first auction, external sales will be remunerated at the regulated tariff minus the grid fee (at the current quarterly price this is about S$162.60/MWh); for all subsequent auctions the remuneration will be the prevailing half-hourly wholesale electricity price (currently averaging around S$80-S$90/MWh).

Winning the auction also provides these companies with renewable energy certificates RECs) they can sell to interested multinational corporations.

Factors triggering aggressive bidding

In comparing the two auction schemes, there are three common factors that trigger aggressive bidding strategies.

Lack of alternative investment opportunities: The auction volume was limited to specific sites where bidders can build their projects under the auction scheme. The lack of alternative business opportunities outside the auction scheme increases bidder’s incentive to bid aggressively, win a contract, and secure the site to build their project. In land scarce Singapore, sites for PV deployment are strongly limited by the availability of buildings where rooftop PVs can be installed on (e.g., those that are not heavily shaded).

In Germany, offshore wind project operators’ access to the market is limited by grid connection. Therefore, and unlike onshore wind or solar PV projects, offshore wind market players cannot build projects outside the auction scheme.

Scale effects: The opportunity to drive down costs through scale effects can be an important motive to offer low-price bids. In Germany, synergies between nearby offshore wind farms can help reduce the high cost for tailor-made maintenance concepts and downtime management.

Ørsted, for example, plans to combine the OWP West and Borkum Riffgrund West 2 projects into one large-scale project with the option of adding more volume in the 2018 auction[4], which they successfully achieved.

In Germany, large incumbent utilities see offshore wind as a new investment area with project volumes similar to what they are familiar with at conventional power stations

In the case of Singapore, economies of scale could be reached by aggregating demand as the auction winner is to supply all rooftops that are part of the scheme in question. Bidders in the SolarNova programme also benefit from a portfolio effect of financing distributed PV installations.

This can only be achieved through bundling numerous small projects. Hence, bidders might choose scale as dominant strategy instead of developing sustainable margins to receive bank financing. Bundling various rooftops into a well-diversified PV portfolio gives access to a number of financing options, such as green bonds or asset-backed securities.

Market share: Even if projected margins for the developer may be relatively low, bidders are prepared to bid aggressively if winning brings them the additional benefit of keeping or expanding market share in the electricity market or, more broadly, in the renewables sector.

In Singapore, winning an auction enables a company to position itself as a leader in the local market just because of the sheer size of the tender. It also offers the almost unique chance to have sufficient renewable energy certificates available to be an attractive contractual party for larger multinationals (e.g., RE100 companies). In addition, winning an auction provides the winner with a valuable government project reference.

In Germany, large incumbent utilities see offshore wind as a new investment area with project volumes similar to what they are familiar with at conventional power stations. Low-price bid strategies demonstrated at previous offshore wind auctions are also proof of the fierce competition between large project operators in the North Sea region.

Increased risk of nonrealisation and market concentration

In situations like the ones observed in Germany’s offshore and Singapore´s SolarNova programme, auctions provide an alternative mechanism for allocating subsidies and open the door to the market. Public support is reduced to a minimum –  a necessary condition for a sustainable market in the long term. Yet, aggressive bidding may lead to difficulties in terms of project realisation and may result in market concentration.

Involving banks and financiers at an early stage, when the PPA or auction documents are being prepared, could help reduce the risk of delays and non-realisation

If aggressive bidding results in underbidding (i.e., the revenue stream does not cover project costs) there is a risk that the project may not be realised. Therefore, auction initiators need to watch carefully the trade-off between the efficiency and effectiveness of an auction.

Having a larger portfolio may help deal with the loss of a project. This suggests that larger and more established industry players are better positioned to win at this type of door-opening auctions. Repeated rounds of auctions where larger parties win can lead to a concentration of actors, which could lower participation rate and ultimately decrease competition.

Recommendations – risk mitigation through auction design

There are several policy measures which may help avoid harmful market concentration and ensure project realisation. By inserting performance clauses in contracts, the risk of having a project with inadequate quality can be lowered. For example, the SolarNova auction requires the winning company to produce a certain amount of electricity annually and sets a limit on the system degradation rate over time. Components in the PV system, for example PV modules and inverters, are required to be certified according to international standards as this also reduces the risk from the government’s or auctioneer’s perspective.

Finding the right mix of measures and balance in the local market context is vital for an effective auction design, especially for technologies as different as solar and offshore wind

Secondly, due to possible delays in securing financing, the commissioning of a project may fall behind schedule. Thus, involving banks and financiers at an early stage, when the PPA or auction documents are being prepared, to improve bankability, could help reduce the risk of delays and non-realisation. This would be particularly helpful in jurisdictions where country risk and capital costs are high, and institutional capacity is limited.

Third-party bid evaluations, for example, can ensure the soundness of the financial offer. Targeted credit lines can facilitate the participation of smaller and more diverse actors.

Finding the right mix of measures and balance in the local market context is vital for an effective auction design, especially for technologies as different as solar and offshore wind.

In summary, aggressive bidding is more likely in markets where auctions act as a door opener to important revenue sources, when bidders aim to achieve scale effects, and secure market share by winning the auction. For policymakers, this kind of market situation can be a signal to adapt auction design by implementing measures that mitigate the risk of inadequate quality projects winning the auction or facilitate the participation of more diverse actors.

Editor’s Note:

Ana Amazo-Blanco is Energy Policies Consultant at Ecofys.

Silvana Tiedemann (M.Sc.) works as a Senior Consultant at Ecofys. She is an expert on policy instruments and regulation for renewable energy and other energy technologies.

Stephen Tay is the Head of National Solarisation Centre at the Solar Energy Research Institute of Singapore (SERIS).

Monika Bieri is a Research Associate at the Solar Energy Research Institute of Singapore (SERIS).

[1] Ecofys, a Navigant company, was part of the consortium advising the Ministry of Economic Affairs and Energy of Germany in the design and implementation of auctions for solar PV, onshore wind, offshore wind, and biomass.

[2] Only existing projects that had not been awarded in the first call could participate. Source: Bundesnetzagentur (BNetzA) (27.04.2018): Ergebnisse der zweiten Ausschreibung für Offshore-Windparks – Press Release. Available from: https://www.bundesnetzagentur.de/SharedDocs/Pressemitteilungen/DE/2018/20180427_Offshore.html?nn=265778

[3] Tariffs are quarterly adjusted, mainly due to changes in fuel prices.

[4] NERA, Method or Madness: Insights from Germany’s Record-Breaking Offshore Wind Auction and Its Implications for Future Auctions, 2017, http://www.nera.com/content/dam/nera/publications/2017/PUB_Offshore_EMI_A4_0417.pdf.