Renewable Energy Tendering Schemes
Auctions and tendering schemes for renewable energy sources (RES) are competitive mechanisms for allocating financial support to RES projects, usually on the basis of the cost of electricity production. In auctions, the price is the only criterion to be evaluated, while tenders may include additional criteria. RES auctions and tenders are organised by public authorities who have the responsibility for the preparation of the tender documents, the publication of the tender, the evaluation of the bids and the selection of the winning bids. Depending on the RES tender design, the bids can refer to installed capacity or electricity production. The tender is competitive if the total cumulated capacity or electricity production that is being offered in the bids exceeds the capacity or electricity production that is being tendered. In some cases, these limits are also defined in the form of the available budget for public financial support. The support that is granted to the winning bids can be in the form of FIT, FIP, capacity payments, certificate prices or investment grants. RES tenders can be technology neutral or focussing on a specific RES technology (e.g. solar PV or offshore wind energy).
The bidding procedure for RES capacity or electricity usually takes the form of a reverse multi-unit auction. This means that offers for multiple units of RES capacity (e.g. in MW), electricity (e.g. in MWh) or individual RES projects are submitted by multiple sellers to a sole buyer who is ranking the bids based on their unit price starting with the lowest offers. In some cases, single-unit RES auctions are organised for a single pre-defined RES project, e.g. an offshore wind park at a specific location. In a sealed bid auction, single undisclosed bids are submitted by each bidder, without knowing the bids of the competitors and being able to react to them (“static auction”). The price determination can take the form of pay-as bid (each bidder receives the price he has offered) or of a common price for all bidders, e.g. the price of the most expensive successful bid (“marginal price”). In open bid auctions, bids are submitted publicly and there is the possibility of adjusting them downwards as a reaction to other bidders (“dynamic auction”) until the least-cost price has been determined. In most RES tenders, maximum price limits are set by public authorities in order to eliminate the risk of excessive bids that would result in high costs for the RES support scheme.
Bidders in RES tenders usually have to fulfil a number of criteria in order to qualify for participation in the tender. These can include requirements related to the bidder (e.g. turnover volume, references, financial solidity, etc.), technical or commercial requirements related to the RES project, as well as the availability of licenses and permits that are required for the RES project. These criteria can either be evaluated in a pre-qualification phase (“two stage tender”) or during the evaluation of the final bids (“single stage tender”). In many cases, bid bond guarantees are required either from the bidding participants or only from the successful participants. In the case of non-realisation or significant delay of a project that has been selected during the tendering procedure, this bid bond can be retained and other types of penalties (e.g. termination of contracts, lowering of support levels, shortening the duration of support, other financial penalties), can be applied. Here it is important to make a clear differentiation between delays that are attributable to the RES investor and delays that are outside of his responsibility (e.g. non-respect of deadlines by public licensing authorities).
Advantages of renewable energy tendering schemes
RES auctions and tendering schemes are supposed to be a cost-efficient way of promoting RES due to the fact that they stimulate competition between different operators, locations and technologies. This competitive element also contributes to revealing the true costs of RES technologies and prevents overcompensation. RES tendering schemes can be combined with other RES support schemes such as FIT or FIP and in this way provide a high level of security to the RES investors. They are very effective in preventing uncontrolled development of RES because the desired capacity additions are defined by public authorities in the context of the tender preparation. This increases the possibilities to centrally plan and coordinate the development of RES.
Disdavantages of renewable energy tendering schemes
The success of a RES tendering scheme is highly dependent on the tender design as well as the number and nature of participating bidders. For the bidders, there are certain costs and risks related to the participation in a tender, which also tends to discourage the participation of small and medium RES investors and can lead to more expensive offers. However, there is the possibility to compensate bidders for their transaction costs related to the tender. If there is a lack of participation and therefore competition in a tender, this can also lead to more expensive offers. In some cases, in particular tenders for individual large-scale RES projects, there might even be the risk that no (suitable) offer is submitted. There is also a potential risk of collusive behaviour among bidders in order to drive up prices, especially in the case of open tenders. On the other hand, the competitive element of tenders can also lead to offers that are not cost-recovering (“underbidding”) and therefore to projects that are not being implemented. This risk can be mitigated by setting qualification criteria for bidders and imposing penalties for non-realisation, although these lead again to a higher risk perception by RES investors. Finally, RES tendering schemes can lead to a stop-and-go RES market development with undesirable consequences for market actors if tenders are not being organised on a regular basis.
The first European countries to experiment with RES tendering schemes have been Portugal, Ireland and the United Kingdom. While some positive experiences have been made (e.g. the development of wind energy in Portugal), some challenges have also been observed, e.g. lack of competition, non-realisation of projects and high prices. Currently, RES tenders are being used for the determination of RES support levels in the Netherlands, Italy, Denmark, France and Cyprus.
Cyprus has started to support photovoltaic projects with a capacity above 150 kW by means of a competitive bidding process. The first tender was organized during 2013 for a total capacity of 50 MW, corresponding to a maximum production of 80 GWh during the first year of operation. Investors were supposed to offer bids for a FIT guaranteed for a duration of 20 years, with a price floor of 2.1 €/MWh. In the tender documents, PV projects were clustered according to their capacity. PV systems are required to be connected to the grid within 12 months after the signature of the contract. If this deadline is not respected, the FIT level will be reduced by 5 €/MWh for each month of delay and the contract can be terminated in the case of a delay exceeding 6 months. Competition in the tender was high with 121 participating investors and 2,150 bids, compared to 23 projects that were finally selected for an average tender price of 86.6 €/MWh. However, following the minimum price levels imposed on the import of Chinese PV modules to the EU in August 2013, several bidders claimed that they would be unable to realise their projects at the offered prices, attempting to renegotiate them with the Cypriot government.
Denmark has a long experience with the organisation of RES tenders, starting in 2004 with the tendering of a sliding FIP for two offshore wind parks with a capacity of 200 MW each. As a result of this first tender, the Horns Rev 2 wind park was built for a guaranteed overall remuneration of 51.8 øre/kWh (~69.5 €/MWh). However, the second bid for the Rødsand 2 wind park had to be re-tendered in 2008, after the winning consortium had withdrawn from the contract, mainly because of a delay in project implementation and an increase in turbine prices. The repetition of the tender resulted in a guaranteed price of 62.9 øre/kWh (~ 84.4 €/MWh). In 2009, the 400 MW Anholt offshore wind park was tendered at 105.1 øre/kWh (~ 136.2 €/MWh). This rather high price resulted from a lack of competition (only one bid was received) due to the difficult market situation and an ambitious time schedule with high penalties for delays. Another barrier was the stand-by requirement for the second-highest bidder to take over the contract and realise the project within the same timeframe if the highest bidder opts out within the first 6 months of the contract. All three wind farms have now been constructed and connected to the grid (Horns Rev 2 in 2009, Rødsand 2 in 2010 and Anholt in 2013). In the meantime, the Danish Energy Agency has announced new tenders for offshore wind parks with a total capacity of 1,540 MW. These two-staged tenders are organized between 2013 and 2015 and realisation of projects is planned from 2017 until 2020. The sliding FIP is guaranteed up to a total production of 50,000 full-load hours, i.e. around 12-14 years of operation. The procedure of the new tenders follows a participatory approach, including an open dialogue with stakeholders on tender specifications and organisation.
France has been holding regular public tenders for RES projects with a capacity of more than 12 MW. In 2005, a total of 620 MW of biomass, onshore and offshore wind energy projects have been selected by means of a tendering mechanism. In 2006 and 2008, further tenders for 550 MW of biomass energy plants were launched. These were followed by two tenders for biomass and onshore wind energy in 2010. Further tenders for offshore wind energy were organised in 2011 (for 3 GW) and 2013 (for 1 GW). For the case of solar energy, simplified tenders are organised for rooftop PV projects with a capacity between 100-250 kW and regular tenders for rooftop and ground-mounted solar energy projects above 250 kW. Since 2009, a total of five tenders for PV projects have been launched, three of which for solar energy projects above 250 kW with a total tender volume of 300 MW (2009, declared unsuccessful because of high prices), 450 MW (2011, leading to 520 MW of accepted offers) and 400 MW (2013). The simplified tenders for PV systems between 100-250 kW are organised in the form of several rounds. The RES capacity that is tendered depends on the previsions of the multi-annual investment programme for the French electricity sector. Tenders are usually differentiated according to regions (continental France and oversea departments/territories) and solar technologies (e.g. CPV, PV with tracking, PV with storage, CSP). The Energy Regulatory Commission (Commission de Régulation de l’Energie - CRE) is responsible for the organization and the formal evaluation of the tenders while the Ministry of Ecology, Sustainable Development and Energy is responsible for the final choice of projects. Offers are submitted electronically through a dedicated online platform. RES investors have 3-4 months in the simplified tenders and 6 months in the regular tenders to prepare their offers. Since 2013, the climate impact of the PV projects has been introduced as a criterion in the evaluation, representing one third of the final note compared to two thirds for the price. Under the tenders for solar PV, up to 1,580 full load hours per year (1,800 full load hours on Corsica and the oversea departments and territories) are compensated with the agreed FIT plus an annual adjustment for inflation; any additional generation receives a uniform FIT of 50 €/MWh. PV plants have to be connected within 18-24 months after publication of the tender results and the duration of the FIT payments (standard 20 years) is reduced by up to four months for each month of delay in the connection. For large PV projects, financial guarantees are requested and can be partially withheld in case of non-realisation.
Italy uses regular tenders to determine FIT for larger RES projects since 2012. This applies to wind energy projects above 5 MW, geothermal projects above 20 MW, biomass/biogas projects above 5 MW and hydro-power projects above 10 MW installed capacity. The tender system is electronic and managed by Gestore dei Servizi Energetici (GSE). Investors submit bids for a per cent reduction from the base FIT. Offers below a 2% reduction are not considered and the maximum possible reduction to be offered is 30% of the base FIT. For each RES technology, annual caps are established on the maximum installed capacity between 2013 and 2015. In case a cap is not achieved, the remaining capacity will be transferred to the following year. For onshore wind energy, annual caps of 500 MW have been set for 2013-2015. For onshore wind energy, FIT reductions from 2.5-24.4% (first tender) and 9.5-19.0% (second tender) have been granted, resulting in average FIT of 117 €/MWh (2012) and 100-113 €/MWh (2013). Participating RES investors need to have a production license, a connection offer from the grid operator as well as a proof of their capacity to finance the project. They also have to submit a bank or insurance guarantee equivalent to 5% of the project volume which is increased to 10% if the project is retained at the end of the tender. Investors have 28 months (onshore wind, bioliquids) or 40 months (all other RES) for the construction and commissioning of their RES project after publication of the tender results. If they fail to meet this deadline, the FIT will be reduced by 0.5% for each month of delay. After 24 months of delay, the FIT guarantee is withdrawn and the final guarantee is withheld.
In the Netherlands, the existing FIP premium scheme SDE (Subsidieregeling duurzame energieproductie) from 2008 was replaced in 2011 with SDE+, a scheme with sliding FIP which are determined by means of technology-neutral auctions. This is supposed to achieve a least-cost promotion of RES. Since 2012, both RES electricity and heating technologies are included under the same scheme. The SDE+ scheme is operated in the form of sequential bidding rounds with increasing prices. For each bidding round, the government sets maximum support levels that increase from one round to the next (in 2013, for example, these were 7 €cents/kWh for the first round, 8 €cents/kWh for the second round, 9 €cents/kWh for the third round, etc.). In this way, low-cost RES technologies are the first to submit their bids and be granted financial support. RES technologies with higher costs can participate in following bidding rounds but only until the overall maximum amount of the available budget has been reached (1.5 billion € in 2011, 1.7 billion € in 2012, 2.2 billion € in 2013, 3.5 billion € in 2014, distributed over the lifetime of the plants). In 2012 for example, the available budget was already exhausted during the first bidding round, resulting in projects bids below 7 €cents/kWh (most of which however for RES heating and CHP, only 20 MW of RES electricity has been offered). There is also a “free category” in each bidding round that is open for projects that are able to produce at lower costs than the (maximum) base amount that has been calculated for the specific technology. The FIP is paid for 15 years and it is calculated as the difference between the price offered for the RES project during the bidding process and the monthly average electricity price. RES projects have a maximum of 4 years for realisation after the conclusion of the bidding process. From the projects accepted in 2011, around 40% had already been realised until mid-2013. Implementation process is monitored on an annual basis and financial penalties apply for non-realisation of large projects (with financial support requirements above 400 million € over their lifetime). Smaller projects that are not realised will be excluded from resubmission to the SDE+ scheme for five years. Due to higher expected costs, the Dutch government plans to organise separate tenders for offshore wind energy projects in 2015.