Polish Auction Not Exempt from Typical Problems

The first Polish auction had, of course, major technical problems. But it is worth looking at whether it avoided the classic failures of RES auctions elsewhere (as discussed in numerous posts on this blog). See also Mott, "The European Commission's Mismanagementof State Aid Rules for Renewable Energy" (2015).

First, the problem for small projects is that much of the costs of initial development is actually about the same as for projects fifty or a hundred times as large. The front-end costs must be absorbed by the developer before the auction and before he is assured of getting any support. This typically has killed small projects in auctions. Often there are no bids at all. Poland experienced this in some degree as the bids made for small projects were lower than the allocated volume of RES support offered.

Second, projects are under-bid. The developer puts in a price that is very low and then hopes that the financing will be there and that the costs by the time of construction are lowered to make it practical. So not infrequently, nothing is built that wins the auction price. Even when some projects are built, they never represent the full amount of RES support awarded in the auction. Attrition is always there and often significant. Now we see that the PV bids in the auction may only work for locations with high sunlight and some projects may not be able to obtain bank financing.  This problem will be even more acute in the wind sector where there will be real competition in bids and under-bidding was already see in the test auction by Price Waterhouse Coopers. It seems unlikely that the number of Polish winning bids actually built will be more than 75% of the awarded support.

The take from this for small projects in PV and biogas is that the small auction (for projects 1-5 MW) will not work well in Poland and that the problems experienced everywhere else will emerge here. Projects will not be developed at the same pace as in the past due to front-end costs and risks. Projects that do bid in the auctions will include many that have little chance of being built due to low bid prices. If the available support exceeds the number of bids, there is, of course, no reason to have an auction, simply offer the support to all projects that are opened by a certain date.

The auction mechanism has helped to cause a slow-down of renewable energy investment in the European Union. It has had a similar consequence in Poland. If that is the objective of the European Commission (being pressured by big utilities) and the Polish Government (owner of big utilities) then it has been successful.