The Fallacy of RES Auctions: Locking Out Developed Capacity

As Poland approaches its first auctions for support for renewable energy, I am reminded of a serious criticism of this approach which I discussed earlier when the European Commission caved into the pressure from big utilities and adopted this as the preferred method of support. See Mott, "The European Commission's Mismanagement of State Aid Rules for Renewable Energy," PowerGen Europe 2015.  For there to be competition in the bids for support, which is the principal factor distinguishing the auction mechanism, that has to be a lot of losing bids. The EC suggests about 50% losing bids. Without losing bids, the auctions serve no purpose that could not be achieved by simply using the support caps directly as a feed-in tariff.

Why should we worry about losing bids?* Because each losing bid represents a project that could be built in the opinion of its developer and its equity and debt funding organizations. This is renewable energy capacity that is "shovel ready" and could be deployed within a relatively short time. It is actually more likely to be build than the winning bids because the developers did not apparently trim the price to such a marginal level that a large number of the winning bids never go further. Winning projects that are not built can range from 20 to 100% of the "successful" bids.

So the auction mechanism actually selects the projects least likely to be built and then excludes many projects that are ready to be built within the support caps of the auction rules.

Now that investment in renewable energy in Europe is declining and many Member States are having trouble meeting the 2020 target for renewable energy market shares, it seems ironic that the EC would find a systematic way to reject new renewable energy capacity that is ready to go to construction.

* Losing bids represent all of the front-end work to have a project approved and permitted. That means that the wind in the location in under contract, the biomass volumes are under contract, the biogas feed-stock is under contract, and the project potential represented by that location is basically "locked down." Losing the bid, therefore, take this capacity out of the mix and is many cases permanently.


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