What the UK RES auctions Prove and Do Not Prove

The UK Government has started a propaganda effort boasting of the results of its renewable energy auctions. There are some lessons proven here and some issues still not obvious to the casual observer.

1. The UK cut off the auction mechanism at 5 MW. Auctions do not work well for small projects and this has been proven time after time. Poland is attempting auctions for less than 1 MW and the results will surely not be stellar.

2. The UK conducted so-called "banding" where there are separate auctions for each technology. This is a procedure that follows the advice of most experts, including ECOFYS in their detailed report to the European Commission last year. The DG Competition in Brussels authorizes this, but still irrationally prefers technology neutral auctions (which they try to exempt for state aid review in the GBER regulation). Poland will try to conduct generally technology neutral auctions, broken down only by under and over 1 MW with a basket for projects producing more than 4000 MWhr per 1 MW of capacity. The mix of RES in Poland is almost certainly going to be more narrow than most EU Member States. Technologies that may be critical in future years will get ignored.

Polish politicians seem determined to ignore EU state aid rules, even in the new law. Experts have concluded that it requires notification and approval and is not fully covered by the notification exemption in GBER. A train wreck in the future? Or will they notify and blame Brussels for subsequent delays? 

3. The UK published reference prices many months in advance. It takes at least 24 months or longer to develop a project to the point of being eligible to bid and Poland will only publish reference prices (the maximum auction bid allowed) 60 days before the auction. Most of the front-end development cost of a project will be at risk before the project developer knows what his revenue can be. Experience in other countries indicates this rewards dominant market players and discourages independent investment and SMEs.

4. The UK notified Brussels of its scheme and received approval. Poland maintains that it will not notify and is running huge risks of subsequent legal problems.

5. The UK propaganda focuses only on what bids were awarded and their price. It does not actually establish that those projects will be built. The press release talks as if these are already online and producing power. Virtually all auctions for RES have seen a serious depreciation in the actual capacity built - sometimes it has been zero!  If the prices bid were really low, then you can expect project attrition as reality sets in and bidders sober up.* The delay between the bid awards and construction is also a major factor since all the EU Member States must meet 2020 targets. The Polish schedule is such that even a 2016 auction will not likely produce the bulk of the electricity awarded by 2020. A 2017 auction is, of course, even more problematic.

Some things were done right in the UK and Poland will have a different and less desirable result. Other issues remain to be decided in the UK. Let's see what gets built and when,

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* Even with penalties, the bids can be done as SPVs and the entity can simply bankrupt itself in lieu of building the projects or actually paying the penalties. The deposits will never be large enough to compel construction and investment in a plant that loses money.


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