International auctions for_renewables

International Auctions for Renewables

commissioned by the European Copper Institute

July 2016

Authors:

Simone Steinhilber

Mario Ragwitz

contributions by: Vasilios Anatolitis

Contact data:

Simone Steinhilber

Competence Centre Energy Policy and Energy Markets

Fraunhofer Institute for Systems and Innovation Research ISI

Breslauer Straße 48 | 76139 Karlsruhe

Phone +49 721 6809-281

mailto:[email protected]

http://www.isi.fraunhofer.de

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Executive Summary ..................................................................................... iii

1 Introduction and Background ............................................................... 1

2 Designing international auctions .......................................................... 9

2.1 General benefits and challenges in international auctions ...... 9

2.2 Reciprocally opened auctions .............................................. 15

2.3 Commonly held auction ....................................................... 18

2.4 Assessment summary .......................................................... 22

3 Case study: Common auction between Portugal and Belgium ........ 24

3.1 Market characteristics and existing support scheme in

Portugal ............................................................................... 25


Belgium................................................................................ 26

3.3 Design of a potential common auction ................................. 27

3.4 Expected performance of a Portuguese-Belgian auction

scheme ................................................................................ 34

4 Policy Implications and General Recommendations ......................... 36

5 References ........................................................................................... 41

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Executive Summary

This report explores the options for international auction designs in the EU and provides recom-

mendations on how the design of both national and international auctions should be considered

in the drafting of the new RES Directive.

Two basic options for international auctions are analysed:

Reciprocally opened auctions in which one Member State holds its own, nationally organised

auctions, and all or part of the target volume is opened for installations located in another

Member State. In return, the second Member State most likely opens all or part of its own

auction to installations in the first Member State.

Common auctions in which two or more Member States hold an auction together. All auction

design elements, including technology scope, target volume, regularity etc. are commonly

determined by both Member States. The common auction may be held in addition to national

auctions or replace them.

The two options display the following features:

Reciprocally opened auctions Commonly held auctions

Required de-gree of coordi-nation/ negoti-ation

High. Participating Member States need to agree to open auctions reciprocally. Design elements which affect the other party, such as target volumes, must be agreed upon.

Very High. Participating Member States need to agree on all design elements of the support mechanism and the auction mechanism itself.

Effort sharing Clear. Each Member State pays the sup-port allocated in its national auctions. Produced RES electricity counts towards the auctioneering Member States’ RES share. Additionally, potential sharing of indirect costs and benefits may be agreed upon.

To be negotiated. Participating Member States can agree on a distribution of tar-get volume, and expenditures will be shared accordingly.

In case of sliding premiums, possibly ad-ditional complications due to differing electricity market prices.

Scalability Potentially complex. Mutual agreement necessary between each pair of Member States.

Good. Common auctions can be held by clusters of Member States wishing to co-operate.

Complexity for international investors

High, especially as more Member States open their auctions. Investors need to fa-miliarise themselves with auction de-signs in each market in which they partic-ipate

Moderate. Less complex the more Mem-ber States participate in the same com-mon auction, as investors only have to fa-miliarise themselves with one auction procedure.

Policy risks, likelihood of retroactive changes

Slightly reduced as compared to national auction schemes due to international agreement, differs with the policy risks of individual countries

Reduced due to international agree-ment. Especially in cluster constellations combining low-risk and high-risk coun-tries the financing risk will be averaged and therefore countries with good po-tentials and higher risks will profit.

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A hypothetical application of a common auction for the case of Belgium and Portugal shows that

such a scheme has potential benefits for the involved countries, but can only be successful if

constraints outside the auction itself are addressed, for instance regarding interconnector ca-

pacities.

The study concludes with a number of recommendations of auction-related points which should

be considered in the currently drafted successor to RES Directive 2009/28/EC (RED II):

RED II may recommend sliding FIPs, but should let Member States decide on the type of

support they want to allocate via their auctions. Member States should be required to de-

sign auctioned support to incentivise RES producers to stop producing as soon as market

prices become lower than the negative value of support.

Member States should be free to implement technology-neutral, technology-clustered, or

technology-specific auctions.

Member States should be free to exempt actors from auctions if they belong to actor or

project size categories that are especially disadvantaged by auctions, or to immature tech-

nologies. Member States should be allowed to apply alternative support measures if an ex-

ante feasibility study finds that auction results will be poor in this specific market for a spe-

cific technology, regardless of installation size, type, or technology maturity.

Member States should be allowed to apply secondary objectives in their auction schemes,

provided that these are well-justified and that cost efficiency remains the main objective.

Auction rules should be flexibly adaptable by Member States. RED II should give guidance

on certain design elements such as ceiling prices and auction periodicity. It should require

Member States to include penalties and pre-qualifications in their auctions, but not pre-

scribe a specific design.

RED II should not prescribe the time and degree of opening of auctions. However, it can

make the opening process easier for Member States by providing a description of options.

RED II should require Member States to take measures that enable stakeholders to partici-

pate in the design of auctions and have easy access to auctions.

Retroactive changes are detrimental to RES support schemes. This also applies to auctions.

RED II should include a clause forbidding Member States to implement such changes.

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1 Introduction and Background

With very few exceptions, the latest General Block Exemption Regulation (GBER - Commission

Regulation (EU) No. 651/2014) which came into force in June 2014 requires Member States to

allocate support via a competitive and market-based mechanism by 2017 if their support meas-

ure is to be approved as justified state aid by DG Competition (European Commission). Effec-

tively, this strongly encourages the implementation of auction-based feed-in premium

schemes1 to support renewable electricity (RES-E). As a result, many Member States are cur-

rently in the process of discussing or piloting auction designs to replace their existing support

schemes in the medium term (see auresproject.eu).

As with all RES support measures, the support allocated by an auction mechanism must hit the

right balance between exposing RES producers to market risks and thus promoting system inte-

gration on the one hand, and shielding them from unproductive risks which would endanger the

achievement of the 2030 RES target of at least 27% (European Council, 2014) on the other hand.

While support measures are increasingly being adapted to fit the requirements of electricity

markets as RES technologies mature, electricity market design also needs to change to accom-

modate new developments such as high RES shares and the possibility to integrate flexible de-

mand (European Commission, 2015). In this report, we assess the risk levels of auction designs

and auction-allocated support measures for investors and auctioneers based on the assumption

that it is in the interest of policy makers to achieve the 2030 RES target.

With the enforcement of the GBER, a great step is taken towards convergence of national sup-

port schemes, which have historically been very diverse and determined nationally in EU Mem-

ber States. The Commission now also explicitly encourages Member States to mutually open

their support measure to non-domestic installations, thus making them increasingly compatible

with the principles of the internal market.

The development of the internal market is a strategic objective of the European Commission,

and a harmonisation or mutual opening of national RES support schemes has been on the polit-

ical agenda for several times in the past. Explicit calls for a harmonised RES-E support scheme

across all EU Member States were heard prominently in 2007/2008, before the introduction to

the current RES Directive 2009/28/EC (RED I). At the time, a harmonised technology-neutral

quota scheme with tradable green certificates was the most prominently discussed option

(Futterlieb and Mohns, 2009). However, this was met with strong opposition from some Mem-

ber States who feared that a harmonised scheme would be neither effective nor efficient in

promoting the deployment of RES-E. The other prominent policy alternative under discussion

foresaw nationally designed, separate support schemes, coordinated based on EU guidelines.

The latter policy alternative was finally adopted in the RES Directive. In order to improve the

1 a variety of possible support instruments in combination with auctions will be discussed below.

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cost efficiency of this regime using national RES targets, the RES Directive introduced three co-

operation mechanisms – statistical transfer, joint projects, and joint support schemes (Directive

2009/28/EC). They enable Member States with high-cost RES potentials to finance RES genera-

tion in a Member State with lower-cost potentials and therefore achieve their 2020 RES target

at lower cost than they could using their domestic resources alone. However, the actual use of

cooperation mechanisms by Member States has been very limited so far due to various reasons

(Klessmann et al., 2014).

With auction mechanisms now being gradually introduced in all Member States, internationally

opened auctions present an opportunity for increased cooperation. Even though auctions as a

support allocation mechanism are strongly favoured by state aid regulation, no harmonisation

takes place in the sense of a top-down, centrally steered support scheme such as was discussed

in 2007/2008. However, an increased opening of Member States’ auction schemes to non-do-

mestic projects is a likely development. In the medium term, RES Directive II (RED II), for which

a proposal is currently being drafted by the European Commission, and which shall succeed Di-

rective 2009/28/EC, presents an opportunity to anchor international auctions in EU legislation

in a more detailed manner.

Given this background, this report aims to explore the options for international auction de-

signs in the EU, including their potential benefits and challenges, and to provide recommen-

dations on how the design of both national and international auctions should be considered

in the drafting of the new RES Directive.

Auctions are a price-finding mechanism and thus present an alternative for a regulator to deter-

mining support levels administratively, for instance through LCOE estimates. In the RES-E con-

text, auctions are combined with a support instrument such as feed-in tariffs (FIT), feed-in pre-

miums (FIP), or investment grants. As mentioned above, for EU Member States a FIP or alterna-

tive instruments that facilitate market integration are clearly favoured by state aid regulation.

In contrast to schemes with administratively set support levels, auction-based schemes have a

higher potential to allocate support rights efficiently by awarding only the lowest-cost projects

in their respective category. They can thus increase the static efficiency of a support scheme and

decrease total support costs. Due to the auction volume being defined ex ante, they include an

inherent mechanism for support budget control, in contrast to instruments that apply adminis-

tratively set support levels. Successful auctions furthermore achieve a high realisation rate,

meaning that those projects which are awarded do actually get built within the realisation dead-

line. However, the success of an auction strongly depends on its design.

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Figure 1: Levels of design elements. Source: del Río et al., 2015, p.9

As shown in Figure 1, the design elements of an auction scheme are determined on two levels

(del Río et al., 2015): Firstly, the kind of support that is being allocated by the auction is specified,

amongst others, by the following design elements:

Technology-specific vs. technology-neutral

Location-specific vs. location-neutral

Size-specific vs. size-neutral

Duration of support

Type of support: investment grant, FIT, sliding FIP, fixed FIP, etc.

Constant or decreasing support level throughout support period.

Secondly, the auction mechanism itself is defined by additional design elements (Haufe and

Ehrhart, 2016), including:

Target volume defined as installed capacity vs. generated electricity vs. budget

Criteria: Price-only versus multiple criteria

Dynamic versus static auctions (sealed bid, descending clock, etc.)

Pricing rule, e.g. uniform price versus discriminatory price rule

Single-item versus multiple-item auction

Instrumentsprice-based quantity-based

FIT FIP Investment grant

Quota

Duration of support

Technology-specific vs. neutral

Etc……

Price level settingmechanism

auction-based

administrative

Price only/multi-criteria

Sealed bid/descending clock/hybrid

de

sign

ele

me

nts

Leve

l 2

Pay-as-bid/uniform price

Price setting mechanism: Auction

Pre-qualification requirements

Penalties

Regularity of auctions

Site selection

Price ceilings

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Pre-qualification requirements

Penalties

Regularity of auctions, i.e. one-off or recurring minimum and/or maximum price

There is no one-size-fits-all solution. Auction designs depend on the policy maker’s objectives

and have to be adapted to the specific conditions that apply to the technology and Member

State in question. Careful design is crucial to the success of any auction. However, a number of

design elements are especially challenging with regard to international auctions. The basic func-

tioning and effects of these design elements shall therefore be illustrated here, while their im-

plications on international auction design are then shown in chapter 2:

Technology-specific versus technology-neutral support

Support measures can either let a number of RES technologies compete freely against each

other, leading to only the lowest-cost options being deployed; or they can provide differing

levels of support to different technologies, thus leading to the deployment of higher-cost

technologies as well, which can drive down their costs in the long term. It has been shown

that technology-neutral schemes lead to lower generation costs in the short term. On the

other hand, this does not necessarily translate into lower support expenditures as technology-

neutral schemes often come with high producer rents for the lower-cost installations. In ad-

dition, technology-specific schemes provide a better incentive for technology learning in the

long term, as immature technologies are supported as well (Steinhilber et al., 2014). Further-

more technology-neutral support might not lead to a minimisation of total system costs under

a static perspective, if some costs are not reflected in the generation cost (e.g. system

integration cost).

In the case of auctions, technology-neutrality can be achieved by letting projects from all de-

sired RES technologies compete against each other. However, RES technologies have different

characteristics, for instance regarding project development times, typical sizes, and risk pro-

files. A multi-technology auction has more difficulty accommodating these characteristics by

tailored design features such as pre-qualification requirements, penalties, or degree of regu-

latory involvement in planning procedures. Uniform design features for several technologies

may unintentionally end up favouring one technology over others solely because their risk

profile corresponds well to the auction design, not because this is the most efficient outcome

in terms of costs.

An auction-based scheme can be made technology-specific in several ways, for instance by

holding separate auctions for each technology, by defining separate technology contingents

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with different ceiling prices in one auction, or by giving favoured technologies a bonus in a

multi-criteria auction.

Location-specific versus location-neutral support

Policy makers may want to steer the geographic distribution of RES installations, for instance

in order to avoid grid constraints or problems with public acceptance in areas where RES in-

stallations reach high densities. Design options to influence the geographical distribution of

awarded projects in an auction scheme include the introduction of a pre-qualification crite-

rion which prevents all projects outside of the desired region(s) from participating in the auc-

tion; contingents with different ceiling prices for different regions or location types; a multi-

criteria auction in which projects from desired regions or location types score higher; or the

use of a reference yield model, although this only has an indirect effect on location and mainly

aims at reducing producer rents (see Agora Energiewende, 2014). Favouring certain locations

represents a trade-off to the policy maker as it will steer RES deployment away from least-

cost sites and will therefore decrease the auction scheme’s cost efficiency.

Type of Support Payments

Auctions can be used to allocate several types of support payments: FITs, FIPs, or investment

grants, all of which have benefits and drawbacks.

Investment grants incentivise the installation of production capacities. Generation is then

solely remunerated on the electricity market, thus exposing the generator to the full market

price signal. However, this also exposes the project developer to the full risk of future elec-

tricity market price developments. Furthermore, for non-variable RES such as biomass, the

hourly market price can be insufficient as an incentive to produce, and a strike price would

need to be set at which the operator is obliged to start producing. For variable RES, invest-

ment grants have resulted in insufficient plant maintenance and undesired plant configura-

tion2 .

2 For instance, a wind power project developer will be incentivised to plan installations with high genera-tor capacity. However, high generator-rotor-ratios result in plants which display high production in strong wind, but fewer annual full-load-hours. From a system perspective, this leads to undesired production peaks. Installations with smaller generators in combination with the same rotor length have a more favourable production profile but are not attractive to the plant developer under ca-pacity-based support. Similar issues arise for other technologies where plant design can influence full-load-hours, such as PV with solar tracking.

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FITs pose a minimum risk to the project developer, as the future income stream of the instal-

lation is guaranteed, independent of electricity market developments. However, the lack of

exposure to market signals also leads to distortions, as, for instance, generators have no in-

centive to stop producing in times of negative prices. Auction-allocated FIT are not covered

under the current GBER and will therefore not be discussed further in this study.

FIPs are the most prominent remuneration type in newly designed auction schemes in EU

Member States at the moment, as they are both an accepted remuneration type under GBER

and can be designed so as to expose producers to market price signals and risks to differing

degrees. Two basic types of FIP are frequently discussed, both of which can be combined with

an auction mechanism: sliding (also known as Contract for Difference) and fixed. In a fixed FIP

scheme, projects bid on a fixed premium on each kWh sold on the electricity market. An

awarded project’s income thus fluctuates with the electricity market price, causing it to bear

the full risk of future electricity price developments, as their total remuneration will be too

low in case the of decreasing future electricity prices and vice versa. The project developer is

likely to add the respective risk premiums to his financing costs, thus raising his required sup-

port level. Electricity consumers, being the party who finances RES support, also bear a price

development risk, namely if electricity prices increase in the long run. In addition, another

problem arises specifically when fixed FIPs are allocated through an auction: Bidders calculate

their bid price on the basis of their valuation of future price developments. Those bidders with

the most optimistic expectations will therefore enter the lowest bids and win the auction.

However, as they are likely to have overestimated future prices, this leads to a higher risk of

their project being unprofitable (a problem known as Winner’s Curse). Once in operation,

installations under a fixed FIP scheme display a rather high degree of market integration. In

case of negative prices, operators will continue producing until electricity prices become

lower than the negative value of the fixed premium. In contrast, under a sliding FIP scheme,

projects bid on a total remuneration level (€c/kWh). The support paid to the awarded project

will consist of the difference of the winning price and the average electricity market value of

plants in the same technology category. Averaging periods should be sufficiently long, i.e. at

least 1-3 months3. A sliding FIP thus provides significantly more security about future income

streams to the plant operator. The risk of Winner’s Curse is lower, as electricity price expec-

tations do not have such a significant influence on how bidders calculate their bid prices. At

3 The length of the averaging period significantly influences the degree of market integration of RES plants. With very short periods (such as one hour), a sliding FIP behaves similarly to a FIT. The plant operator always receives the guaranteed total remuneration. Under longer averaging periods, the premium payment is calculated based on the average market value of the given RES technology in the last x months. The reference value is thus not the same as the electricity price for which the RES operator is actually selling his electricity. Plant operators are incentivised to sell as much as possible at times when electricity prices are higher than the average market value for their technology.

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the same time, once the plant is in operation, the operator still has an incentive to produce

at times when electricity prices are high, assuming sufficiently long averaging times for refer-

ence market values. Producers will only know the exact amount of the premium ex-post,

when the average market value over the defined time frame is known. At times of negative

prices, producers react in a similar fashion as under a fixed FIP, continuing their production

until the price becomes lower than the negative value of the expected premium. Electricity

consumers bear some risk in case electricity prices decrease, as support levels fluctuate with

changes in electricity market prices. At the same time, consumers do not risk having to pay

for overcompensation such as under a fixed FIP. A compromise solution in terms of risk distri-

bution is a fixed FIP with cap and floor prices (Klobasa et al., 2013). In addition, a variable FIP

expressed as a percentage of the market price is thinkable. This option delivers an exagger-

ated market signal to RES producers, thus giving them a greater incentive to adjust their pro-

duction accordingly. However, this option also greatly increases market price risks to produc-

ers and is therefore not recommended.

For both main premium design options, sliding and fixed, there is an intense discussion on the

continuation of premium payments during periods of negative prices. The EU Commission

demands within its environment and energy state aid guidelines that a support regime should

not give any incentives for the production of electricity from RE in the case of negative prices

on the electricity market. The reason for this requirement is that negative prices which are

caused by renewable energy support schemes are considered inefficient. However, as has

been shown by Höfling at al. (2015) continued support during periods of negative prices can

lead to cost efficient RES target achievement if negative prices are higher than the negative

green-value of RES-E. Furthermore, moderately negative prices can lead to dynamic efficiency

of the power market as they are an important incentive for flexibility options leading to a

reduction of must-run capacities, demand side management and investments in storage.

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Figure 2 Support levels and revenues under different FIP types. Source: Adapted from Klobasa et al.,

2013

For the above-mentioned reasons, a sliding FIP with a sufficiently long averaging period is

recommended for national auction-based FIP schemes, as both fixed and sliding FIPs incentiv-

ise market-compatible dispatch behaviour, but the sliding FIP comes with lower overall risks.

Keeping these considerations in mind, we shall now turn to the specific challenges of designing

cross-border auctions.

Sliding FIP Fixed FIP

Support level

Cap-and-FloorFIP

Market price

Total revenue (hourly)

Total revenue (monthly average)

FIP aspercentage

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2 Designing international auctions

The benefits and challenges of international auctions are more or less pronounced depending

on the design features of the auction scheme. International auctions can take two basic forms:

The first possibility is for a Member State to hold a na-

tional auction and open all or a maximum part of the

auction volume to installations from other Member

States. For reasons of political acceptability, this Mem-

ber State will usually demand reciprocity, meaning that

only installations from those Member States can apply

which in turn have opened their national auctions to

foreign installations. The second possibility are com-

monly held auctions, meaning that two or more Mem-

ber States will hold an auction which is open to installa-

tions from the participating countries. These common

auctions can be held instead of or in addition to na-

tional, closed auctions.

This chapter will first present benefits and challenges

shared by both these international auction types. Sec-

ondly, specific issues concerning each of the two types

are discussed. The chapter concludes with a table sum-

marising the main benefits and challenges of each auc-

tion type.

2.1 General benefits and challenges in international auc-tions

The potential benefits of international auctions are similar to the arguments previously brought

forward in favour of a harmonised RES-E support scheme and for introducing the cooperation

mechanisms into the existing RES Directive: As natural resource potentials differ widely across

the EU, a policy regime which encourages exploitation of the least-cost sites would lead to higher

static efficiency in the sense of reduced generation costs (Resch et al., 2014). International auc-

tions would potentially allocate support to those projects located at the most resourceful sites.

In addition, a support mechanism based on an international agreement may be less prone to

retroactive changes. These have been undertaken previously in many national support schemes

and led to severe investor uncertainty (Keep-on-track, 2013). Furthermore, the compatibility of

nationally isolated RES support schemes with the EU internal market is deemed questionable by

many (see for instance Bot, 2014), and a gradual opening can represent a political compromise

between those actors pushing for a fully market compatible regime and those aiming to protect

A note on “target” achievement

The main motivation for cooperation

in the form of international auctions is

to lower the costs of target achieve-

ment. In the time frame until 2020,

this means the achievement of the

binding national targets as defined in

Directive 2009/28/EC. For the post-

2020 period, we use the term “target”

to refer to a Member State’s planned

RES deployment trajectory, deter-

mined by the Member State itself, be

it through a pledging mechanism un-

der an EU governance framework,

purely nationally, or otherwise.

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well-functioning national schemes. As the new state aid regulation has prompted a large number

of Member States to revise their support measures and to introduce auctions, this provides a

policy window in which international auctions can be considered more easily.

However, the design of successful international auctions does not come without challenges.

Generally, as with previous policy measures that aimed to maximise the use of best sites to drive

down overall generation costs, possible problems can include:

In Member States with abundant low-cost RES potentials, installations may reach very

high densities (“hot spots”), thus requiring grid expansions and reinforcements. High

concentrations of RES also affect the profitability of other energy producers in the same

market zone.

Social and political acceptability: In Member States without low-cost RES potentials, the

public may not approve of having to finance support for RES installations located in an-

other country, as positive effects on labour markets or domestic industry are then per-

ceived as benefiting the population of that country. A forceful opening of auction

schemes may thus put functioning and accepted national schemes at risk. In Member

States with abundant low-cost RES potentials on the other hand, “hot spot” creation can

lead residents to oppose either the installations themselves or the necessary grid ex-

pansions, thus risking social acceptability of RES in general.

At least in the short term, international auctions are expected to exist alongside purely

national support. In order not to undermine national support measures, they must

therefore be coordinated carefully. In the case of auctions, such considerations are es-

pecially important when setting target volumes, as the overall target volumes from na-

tional and international auctions combined need to be restrictive enough to still create

competition in the market(s) covered by both measures.

Additional challenges in auction design stem from differing framework conditions across Mem-

ber States:

RES installations must obtain building and environmental permits as well as documen-

tation to verify that grid access is ensured. The length and complexity of such permitting

procedures vary greatly across Member States. This influences generation costs of RES

projects. Permits are also often used as a material pre-qualification in auctions to ensure

that participating bidders both have a sincere intention of realising the project and that

the project has reached a stage of development which makes it likely that it will be

brought to completion at a predictable cost. However, if permits are not equivalent

across countries, this makes RES projects more difficult to compare for the auctioneer.

Access to finance: Costs of capital and typical debt-equity-ratios for RES projects differ

between countries. While large investors can be expected to have access to finance –

11

albeit at differing conditions depending on the location of their planned project –

smaller actors are more dependent on local sources of finance. Conditions for getting

credit may thus differ considerably between countries, especially for smaller investors.

Electricity market prices: As long as European electricity markets are not fully coupled,

wholesale market prices differ across Member States, both in their short term fluctua-

tions as well as longer-term averages. Price development is influenced by a multitude of

factors, not least the share of electricity being generated by variable renewable sources

in a specific price zone (European Commission DG Energy, 2014).

These challenges and differing framework conditions require the designers of both types of in-

ternational auctions to make decisions about the following design elements:

Setting the target volume

As we will see in the following sections, target volumes must always be set considering parallel

national support schemes.

Support expenditures, support type, and the reference electricity price

As mentioned in chapter 1, it is recommended for national auctions that support to winning

bidders is paid in the form of a sliding premium in national auctions. This type of premium,

however, becomes more complex in an international auction. The amount of premium re-

ceived by the plant operator is influenced by the average market value, meaning the electric-

ity market price at which plants in the same technology category (e.g. wind) were able to sell

during a defined period (e.g. the last 3 months). Market values will likely differ between Mem-

ber States A and B, as long as markets are not fully coupled and interconnector capacity re-

mains a bottleneck

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Figure 3 Influence of electricity market prices on support expenditures

Figure 3 provides a numerical example of two Member States with different LCOE who con-

duct an international auction with a target volume of 100 MW. Due to the lower LCOE in

Member State B, the whole volume is awarded to projects in that country. We assume that

the reference electricity price is that of the electricity market where the plants are situated.

Support expenditures are determined by the difference in the bid price (which for simplifica-

tion we assume to be equal to LCOE in this example) and the market value on the local elec-

tricity market. Depending on the market value, support expenditures can differ significantly.

In case 2, support expenditures are even higher than they would have been, had all installa-

tions been built in country A, despite the higher LCOE there.

Instead of defining country B’s electricity price as the reference, the price of country A or an

average of both prices could be selected. Another alternative is to revert to fixed premiums

in the case of international auctions. The implications of these alternatives on effort sharing

between the two Member States depend on the concrete auction format and are thus dis-

cussed in more detail in sections 2.2 and 2.3.

Effort sharing and payment mechanism

The effort sharing arrangements between Member States is a matter of negotiation. Next to

the award prices expected to be realised in the auction, there may be other factors influencing

the negotiation. Burden sharing considerations are mostly relevant in the context of common

auctions, but may also play a small role in reciprocally opened auctions.

Assumptions:• 2 Member States• Total volume of auction: 100 MW, corresponds to 100 GWh/a (at 1000 FLH)•Country A: LCOE 100 €/MWh• Country B: LCOE 80 €/MWh•Reference electricity price: Country in which installation is located

LCOE (€/MWh)

Market value (€/MWh)

Support payment (€/MWh)

Case 1:

60

40

100

80 50

30

Country A Country B

Volume in country A: 0 MW support expenditures 0 €Volume in country B: 100 MW support expenditures 3.0 mn €

Case 2:

60

40

100

80 30

50

Country A Country B

Volume in country A: 0 MW support expenditures 0 €Volume in country B: 100 MW support expenditures 5.0 mn €

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Firstly, the installation of RES has indirect costs and benefits. Apart from the generation costs,

the additional system costs of large amounts of RES have to be borne by the country in which

the installations are situated. In addition, benefits such as labour market effects, local invest-

ments, and reduced air pollution from replaced fossil fuel generation also remain in the pro-

ducing country. Depending on how highly these effects are valuated, compensation could be

requested either by the country in which most RES are situated, or by other partners. Sec-

ondly, the willingness to pay for a kWh of RES-E may be different in the participating coun-

tries, depending on the political importance of achieving a certain RES share and on the op-

portunity cost of producing RES-E without an international auction.

Once the burden sharing is agreed upon, there are a number of options to then organise the

actual payment streams for support expenditures between the participating Member States.

Necessity of physical import of non-domestic RES-E

In the short term, there is no technical necessity for physical import of the electricity produced

by non-domestic RES installations. The produced electricity can count towards the paying

Member State’s RES target in the form of a statistical transfer. However, support payments

linked to a physical transfer may be easier to communicate politically.

In the long run, grid expansions must keep up with RES deployment, and this also applies to

cross-border interconnections. Therefore the physical and market impacts should be included

in the design of cross-border auctions. A conceptual approach to consider the impact of new

RES-E in one country on an electricity market in other countries could be as follows: A new

unit of RES-E capacity installed in a MS, causes changes in generation mixes of one or more

MS, depending on the status of the grid and the economic dispatch. It is a valid assumption

that the change in generation pattern a MS experiences from supporting RES installations in

other countries decreases with the “electrical distance” between the MS and the RES-E instal-

lation under consideration. The change in generation mixes induces a benefit and the power

from the RES-E capacity displaces some alternative source of generation, so that costs for fuel,

emissions and possibly capacity can be saved. One has to aggregate the cost savings this unit

causes over its lifetime in all MS in order to assess the full benefit of a new unit of RES-E

capacity.

Pre-qualification requirements - Comparability of licenses and permits

It is strongly recommended for the auctioneer to require material pre-qualifications from par-

ticipating bidders. If licenses, grid access certificates and building permits are to be used as

material pre-qualifications, their comparability between countries needs to be verified and

14

pre-qualification requirements adapted accordingly. Where possible, policy makers should

aim for a convergence of permitting procedures and grid access guarantees in the long run.

Pre-qualification requirements - Site eligibility

Member States may restrict eligibility of RES-E projects for support for a variety of reasons by

applying regulatory measures outside of the auction design itself. Restrictions may for in-

stance apply to land availability if projects are only allowed to be situated on certain site cat-

egories, as is the case in Germany where PV plants on conversion sites and side strips along

roads or railroad tracks are eligible for support. The use of agricultural land for this purpose,

although low in costs, is strictly limited for reasons of ecology and public acceptability (Kless-

mann et al., 2014).

If site eligibility is handled differently in the participating Member States, this influences the

LCOE of the projects competing against each other. A Member State which rules out certain

land types for ecological reasons must also consider whether it wants to finance RES installa-

tions on exactly this land type in another Member State where this is not forbidden.

Location-specific versus location-neutral support - Steering geographic distribution

The participating Member States may wish to steer the geographical distribution of RES pro-

jects, for instance to align RES deployment with existing and planned grid infrastructure. If

differences between LCOE are large, they may want to prevent all installations being built in

one Member State, as the resulting loss of social acceptability might outweigh the gains in

economic efficiency. Member States may thus consider contingents or boni for certain regions

in order to ensure a more even distribution of awarded projects.

Similar negotiations are necessary if the participating Member States wish to realise other

secondary objectives, such as for instance with regard to actor diversity, labour market ef-

fects, innovation and domestic industry effects.

Coordination of grid plans with RES deployment

International auctions make RES deployment trajectories more difficult to predict, as the ca-

pacity volumes necessary to achieve one Member States’ RES target are likely to be spread

across two or more Member States. The participating Member States thus need to coordinate

their respective grid planning with each other and with the outcomes of the international

auction.

All of the above design issues are subject to negotiation between cooperating Member States

and have different effects depending on whether they are applied in an opened national auction

15

or a common auction. These specific effects shall thus be illustrated in more detail in the next

two sections.

2.2 Reciprocally opened auctions

The concept:

Member State A holds its own, nationally organised auctions. All auction design elements,

including technology scope, target volume, regularity etc. are determined by that Member

State. All or part of the target volume is opened for installations located in Member State B.

In return, Member State B opens all or part of its own auction to installations in Member State

A, which, however, may differ with respect to technology scope and other design elements.

If Member State C decides to open its auctions, it will negotiate with Member State A and/or

B for accessible target volumes.

In this approach, each Member State largely determines the design of its own auction. In princi-

ple, one Member State could open its auction unilaterally to installations from one or all other

Member States. In practice, however, for reasons of political acceptability both within its own

constituency and with other Member States, it is more likely that a country will only open its

auction after a mutual agreement for reciprocal opening. By opening his auction to installations

from a second Member State, the auctioneer may significantly affect the RES market in that

Member State, and thus the outcome of any national auctions held there. Such indirect effects

as well as the conditions of reciprocity must therefore be negotiated between the Member

States. Other design elements have a small or no effect on the other Member State and can thus

be decided by the Member State holding the auction itself. The implications of the following

design elements are especially relevant in opened auctions:


If Member State A unilaterally opens all or part of its target volume to installations located in

Member State B, this will increase competition in the opened auction, especially if LCOE in

Member State B tend to be lower. It will also potentially decrease competition in any auction

Member State B may hold nationally. If the two Member States mutually open the same vol-

ume, this will affect competition levels in both Member States to differing degrees, depending

on how much LCOE differ between the two countries. The opened volumes are thus an im-

portant subject of negotiation between the participating countries. Market studies in each

16

participating Member State are necessary, taking into account the volumes available in each

market and the volumes already demanded by existing national auction schemes.


Figure 4 extends the example introduced in Figure 3, this time assuming that country A is

holding an auction, of which it has opened the whole volume for installations from country B.

As previously, all capacities are awarded to installations in country B due to their lower LCOE,

and support expenditures differ according to the market value of the electricity in country B,

as the reference electricity price is defined as the price in the country where the installation

is located. However, this time it is country A who counts the produced electricity towards its

RES target, who pays the full support expenditures, and who therefore bears the full risk of

decreasing market values in country B.

Figure 4 Influence of electricity market prices on support expenditures in an opened auction

Country A may alternatively define the reference electricity price as its own electricity price,

or as an average between the electricity prices of countries A and B. If the market values in

country A are used as the reference, country A bears a similar risk, namely that of its own

electricity price decreasing and thus driving up support expenditures (although from the per-

spective of consumers, this would be compensated by lower electricity prices). At the same

Assumptions:• 2 Member States, country A opens auction to installations from country B• Total volume of auction: 100 MW, corresponds to 100 GWh/a (at 1000 FLH)•Country A: LCOE 100 €/MWh• Country B: LCOE 80 €/MWh•Reference electricity price: Country in which installation is located

LCOE (€/MWh)



Case 1:

60

40

100

80 50

30

Country A Country B

National auction:Volume in country A: 100 MW support expenditures 4.0 mn €

International auction:Volume in country A: 0 MW support expenditures 0 €Volume in country B: 100 MW support expenditures 3.0 mn €Burden sharing:decreased supportexpenditures forcountry A increased deploymentand local benefits forcountry B

Case 2:

60

40

100

80 30

50

Country A Country B

National auction:Volume in country A: 100 MW support expenditures 4.0 mn €

International auction:Volume in country A: 0 MW support expenditures 0 €Volume in country B: 100 MW support expenditures 5.0 mn €Burden sharing :no local benefits, increase in support expenditures for country A increased deployment and local benefits for country B

17

time, RES project operators face a very high risk of receiving support payments which do not

correspond to the market values they are actually realising on their domestic market, thus

potentially making their project unprofitable. In an auction-based scheme, bidders will at-

tempt to predict these domestic market prices to determine their bid level, thus leading to

the same risk of Winner’s Curse as mentioned previously for the fixed FIP. This design option

is therefore not recommended. The average electricity price of both countries, on the other

hand, is an option that spreads the risk more evenly between Member State A and the plant

operators. However, the main unproductive risk that remains on the side of the operator un-

der such an average market price is the lack of interconnector capacity.

Fixed FIPs, due to the strong influence of future market prices on remuneration, carry the

biggest incentives to build RES plants in that country in which capacities are still needed. How-

ever, as mentioned above, future electricity prices are hard to predict since they are influ-

enced not only by CO2 and fossil fuel prices but also by the development of demand. A fixed

FIP thus poses a higher risk to the bidder and is more likely to lead to Winner’s Curse. The

auctioneer must balance higher risk premiums for the investor as well as the risk of overcom-

pensating the winning installations in case of higher market prices against the risk of high

support expenditures under a sliding premium if foreign market values decrease. Taking all

these risk factors into account, an average market price of countries A and B as reference

price combined with a sliding premium may be the best compromise between the risk for the

auctioneer and the investor.


The effort sharing arrangement in reciprocally opened auctions is comparatively clear, as each

Member State pays the support which was allocated in its own auction. Questions about com-

pensation of indirect costs and benefits may still arise. Effects in each country should be sim-

ilar if the countries open similar volumes to each other. However, if LCOEs in the participating

countries are very different, leading in mainly projects from one country being awarded, this

may lead to imbalances in indirect effects.

Regarding the organisation of payment streams, one possibility is that all plants receive sup-

port payments from the DSO/TSO they are connected to. At the end of each year, each coun-

try makes a compensation payment to its partner country to cover the support expenditures

for the plants that were awarded in its opened auction. Alternatively the payments by the

DSOs may be aggregated at TSO level and shared between the TSOs according to a predefined

rule, which considers in the auction volume of each country and the agreement on how to

share indirect costs and benefits.

18

Reciprocally opened auctions do not bring about a reduction of complexity for investors, as each

country’s auction follows its own design. Countries who want to newly open their auctions can

learn from existing best-practice examples of opened auctions, but will have to go through indi-

vidual negotiations with each Member State they want to cooperate with.

2.3 Commonly held auction

The concept:

Member State A and B hold an auction together. All auction design elements, including tech-

nology scope, target volume, regularity etc. are commonly determined by both Member

States. The common auction may be held in addition to national auctions or replace them.

A greater number of Member States may decide to form a cluster to implement a common

auction, thus requiring them to negotiate all of the above points.

This approach requires a high degree of detailed negotiations, as every single design element in

a common auction is subject to agreement. However, once a common auction mechanism is set

up, additional Member States can join if they are willing to accept the existing auction design.

Design elements with far-reaching implications include:


Participating Member States must agree on a target volume for their common auction. Just

as in reciprocally opened auctions, the target volume of the common auction must take into

account volumes auctioned in other, purely national auctions. Total volumes must be signifi-

cantly smaller than the volumes supplied by the market in order to ensure sufficient compe-

tition.


Figure 5 repeats the previous example for the case of a common auction with an agreed bur-

den sharing of 80%/20%. Member States pay support to the installations in their country and

afterwards make compensation payments to each other to ensure that Member State A bears

80% of support expenditures and may count a corresponding share of the produced electricity

towards its RES target, and Member State B takes over the remaining 20%. Again, we assume

that the reference electricity price is that of the country in which the installations are located.

19

Figure 5 Influence of electricity market prices on support expenditures in a common auction

In the first case, both country A and B benefit from the common auction in comparison to

each conducting a national auction, either through decreased support expenditures or

through local benefits. However, there is a risk that the second case occurs, in which both

countries suffer either a decrease in local benefits or an increase in support cost burden.

Using the market price of country A as the reference value is not a meaningful alternative in

a common auction. However, Member States may agree to spread their risk by using an aver-

age of both countries’ market prices as the reference. As more countries join the cluster, the

reference market price would then be defined as the average of all their market prices.

Fixed premiums, as described above for reciprocally opened auctions, will increase the risk

for investors and also carry some risk for the auctioneer which has to be balanced against the

risks posed by sliding premiums.


The effort sharing arrangement in a common auction is less clear than in an opened auction.

Firstly, the participating countries must agree on who receives which share of the produced

Assumptions:• 2 Member States holding a common auction• Total volume of auction: 100 MW, corresponds to 100 GWh/a (at 1000 FLH)• Auction share country A: 80%• Auction share country B: 20%• Country A: LCOE 100 €/MWh• Country B: LCOE 80 €/MWh•Reference electricity price: Country in which installation is located

LCOE (€/MWh)



Case 1:

60

40

100

80 50

30

Country A Country B

National auction:Volume in country A: 80 MW support expenditures 3.2 mn €Volume in country B: 20 MW support expenditures 0.6 mn €

International auction:Volume in country A: 0 MW support expenditures 0 €Volume in country B: 100 MW support expenditures 3.0 mn €Burden sharing :Support expenditures country A: 2.4 mn € (80% * 3.0 mn €)Support expenditures country B: 0.6 mn € (20% * 3.0 mn €)decreased supportexpenditures forcountry A increased deploymentand local benefits forcountry B

Case 2:

60

40

100

80 30

50

Country A Country B

National auction:Volume in country A: 80 MW support expenditures 3.2 mn €Volume in country B: 20 MW support expenditures 1.0 mn €

International auction:Volume in country A: 0 MW support expenditures 0 €Volume in country B: 100 MW support expenditures 5.0 mn €Burden sharing :Support expenditures country A: 3.2 mn € (80% * 5.0 mn €)Support expenditures country B: 1.8 mn € (20% * 5.0 mn €)no local benefits from deployment, no increase in expenditures increased support expenditures, increased deployment and local benefits forcountry B

20

electricity to count towards his national target. Secondly, the burden of support expenditures

must be allocated. The simplest option is to divide support expenditures by the same ratio as

the produced electricity. However, indirect costs and benefits can be an argument in favour

of a different cost distribution. Secondly, the negotiation is influenced by the countries’ will-

ingness to pay. In case of the country with higher LCOE, its willingness to pay will be influ-

enced by the support expenditures which would be caused by installing its own RES on its own

territory, which may be higher than the prices awarded in the common auction. This country

may thus be willing to pay more. The country with lower LCOE, on the other hand, may realise

the same support levels in a purely national auction, without sharing its lowest-cost potentials

with another country. It may thus have a lower willingness to pay.

Regarding the organisation of support payment streams, one possibility is that all plants re-

ceive support payments from the DSO/TSO they are connected to. At the end of each year,

support expenditures are tallied up and a compensation payment is made between the TSOs

of the two countries according to the effort sharing agreement. Alternatively, the two coun-

tries can create a common fund to which they contribute according to the effort sharing

agreement, and out of which support payments are then taken.

The auction can be scaled up into Member State clusters with relatively little additional com-

plexity. Such a development is also beneficial to investors, as they only need to familiarise them-

selves with one auction design.

Clusters of Member States can in principle be created in a bottom-up or top-down process,

where the most efficient and effective auctions would be expected from clusters that fulfil the

following criteria:

Differences in natural resource endowment: A significant increase in cost efficiency is

possible if Member States abundant low-cost potentials team up with Member States

with fewer natural resources.

Wealth differences: Ideally, financially strong Member States will finance RES deploy-

ment in weaker Member States. This will likely go along with a decrease in policy risks

and thus lower risk premiums from investors.

Physical proximity: As RES shares rise across Member States, physical transfer between

partnering countries becomes more relevant and is easier if the partners are geograph-

ically (or more precisely: in terms of electrical connectivity) close.

Coupled markets: With electricity market prices having a great effect on support ex-

penditures, cooperation within coupled markets poses fewer risks to Member States.

Coordinated grid development plans: Cooperation within a group of Member States

which coordinates grid development plans, including interconnectors, ensures better

grid utilisation and decreases curtailment.

21

It is not likely that a cluster will fulfil all of the above criteria. However, to cover at least part of

them, clusters could be modelled after existing regional groups as suggested by Gephart et al.

(2015):

the PLEF (Pentalateral Energy Forum) or Electricity Regional Initiatives for the field of

electricity markets

ENTSO-E regional groups or BEMIP (Baltic Energy Market Interconnection Plan) for

Member States with existing coordination regarding infrastructure planning and opera-

tion

NSCOGI (North Sea Countries’ Offshore Grid Initiative) for all of the above issues

We recommend letting Member States form clusters on a voluntary basis in a bottom-up pro-

cess. Top-down clustering is unlikely to be politically feasible and will not lead to Member States

having ownership for their cluster.

22

2.4 Assessment summary

The following table summarises the characteristics of both auction types with regard to a range

of criteria which are expected to be relevant for policy makers when considering the introduc-

tion of international auctions.

Table 1: Characteristics of reciprocally opened auctions versus commonly held auctions

Reciprocally opened auctions Commonly held auctions

Required degree of coor-

dination/negotiation

High. Participating Member States

need to agree to open auctions re-

ciprocally. Design elements which

affect the other party, such as tar-

get volumes, must be agreed

upon.

Very High. Participating Member

States need to agree on all design

elements of the support mecha-

nism and the auction mechanism

itself.

Effort sharing Relatively clear. Each Member

State pays the support allocated in

its national auctions. Produced

RES electricity counts towards the

auctioneering Member States’ RES

share. Additionally, potential shar-

ing of indirect costs and benefits

may be agreed upon.

To be negotiated. Participating

Member States can agree on a dis-

tribution of target volume, and ex-

penditures will be shared accord-

ingly.

In case of sliding premiums, possi-

bly additional complications due

to differing electricity market

prices.

Scalability Potentially complex. Mutual

agreement necessary between

each pair of Member States.

Good. Common auctions can be

held by clusters of Member States

wishing to cooperate.

Complexity for interna-

tional investors

High, especially as more Member

States open their auctions. Inves-

tors need to familiarise them-

selves with auction designs in each

market in which they participate

Moderate. Less complex the more

Member States participate in the

same common auction, as inves-

tors only have to familiarise them-

selves with one auction proce-

dure.

23

Policy risks, likelihood of

retroactive changes

Slightly reduced as compared to

national auction schemes due to

international agreement, differs

with the policy risks of individual

countries

Reduced due to international

agreement. Especially in cluster

constellations combining low-risk

and high-risk countries the financ-

ing risk will be averaged and there-

fore countries with good poten-

tials and higher risks will profit.

24

3 Case study: Common auction between Portugal and Belgium

This case study shall explore the possibility of a common auction between Belgium and Portugal.

The case is promising as Portugal has low-cost RES potentials especially in PV and has expressed

a clear interest in cooperation mechanisms in the past (DGEG, 2013). Belgium on the other hand,

has comparatively high potentials in offshore wind, but less abundant natural resources in low-

cost technologies. It can therefore be economically attractive for Belgium to finance PV installa-

tions in Portugal rather than costly offshore wind parks on its own coast.

Figure 6 LCOE estimate for large-scale PV installations in Belgium and the Iberian Peninsula in

2020, based on 7% interest rate. Source: Own calculations.

The case study shall focus on a potential common auction for large-scale PV, as the Portuguese

potentials for this technology are abundant and low in cost, as indicated in Figure 6. We will first

introduce the market characteristics and support measures in place in both countries and then

move on to a possible common auction design.

This case study serves as a hypothetical example and does not reflect official Portuguese or Bel-

gian positions.

25

3.1 Market characteristics and existing support scheme in Portugal

Portugal, with its roughly 10.5 million inhabitants, displays the following key figures concerning

its RES-E sector:

Table 2 Key figures for Portugal

Electricity consumption 2014 52 TWh (Eurostat, 2016), of which 2% im-

ported (IEA, 2016b)

Electricity generation mix hydro 30%, wind 23.3%, coal 23%, natural gas

12.5%, biofuel and waste 6.4%, oil 3.2%, solar

1.2%, geothermal power 0.4% (IEA, 2016b)

Target shares 2020

RES in gross final energy consumption

RES-E in electricity generation

31% RES,

60% RES-E

(Presidencia do Conselho de Ministros, 2013)

Actual shares 2014 27% RES , 52% RES-E (Eurostat, 2016)

Actual PV deployment 2014 415 MW, 627 GWh (DGEG, 2016)

NREAP planned PV deployment 2020 670 MW, 1039 GWh (Presidencia do Con-

selho de Ministros, 2013)

Portugal’s electricity production is highly volatile due to the high share of hydro power. The

country has developed an integrated Iberian electricity market with Spain – MIBEL. Intercon-

nector capacity is a relevant bottleneck to export electricity from the Iberian Peninsula. This

applies mainly to the connectors between Spain and France. Spain and Portugal have made good

progress towards their 3 GW interconnector capacity target for 2017, and MIBEL saw price con-

vergence between the two countries for 85% of the time in 2014. In the wholesale market, the

four largest generators owned 61% of the installed capacity in 2013 (IEA 2016b).

Portugal reduced its planned PV deployment in its reviewed NREAP of 2013 as a result of the

economic crisis. Despite its favourable natural resource conditions, the country foresees only

670 MW of PV to be installed, of which 415 MW had been realised in 2014. However, with the

costs of PV installations continuing their rapid decline, the LCOE of large-scale projects are now

comparable to those of onshore wind in some areas of Europe. It is therefore a valid assumption

that PV will play a bigger role again in Portugal in the future.

26

Auctions to allocate support for RES installations have taken place in Portugal before. Three auc-

tion rounds for onshore wind were implemented between 2006 and 2008 (del Río, 2016). Cur-

rently, no financial support is available for newly constructed large-scale PV installations in Por-

tugal. PV parks can opt to enter the so-called General Regime, under which they sell electricity

in the market (MIBEL) or via bilateral purchase agreements. They enjoy dispatch priority but are

responsible for balancing. The Alternative Regime is foreseen to provide financial support via a

competitive multi-criteria auction mechanism in which projects bid a discount on the tariff pub-

lished by the government (IEA, 2016b). However, no auction rules have been published and no

rounds were held so far. There is some pressure from industry stakeholders to introduce PV

auctions in the near future (APREN, 2016).


Belgium

Belgium has around 11 million citizens and is thus similar to Portugal in population size, albeit

with a much smaller surface area. Its RES-E sector is characterised by the following figures:

Table 3 Key figures for Belgium

Electricity consumption 2014 89 TWh, of which 21.5% imported (IEA,

2016a)

Electricity generation mix nuclear power 47.2%, natural gas 27%, biofu-

els and waste, 7.9%, wind, 6.5%, coal 6.2%,

solar 4%, hydro 0.4%, oil 0.3% (IEA, 2016a)

Target shares 2020

RES in gross final energy consumption

RES-E in electricity generation

13% RES,

20.9% RES-E

Actual shares 2014 8% RES

13.4% RES-E

Actual PV deployment 2014 3024 MW, 2883 GWh (CONCERE-ENOVER,

2015)

NREAP planned PV deployment 2020 1340 MW, 1139 GWh (CONCERE-ENOVER,

n.d.)

27

Due to the geographical conditions, renewable energy potentials are comparatively scarce in

Belgium, and –under the current technological possibilities – mainly wind offshore and biomass

have a promising potential in the near future (IEA 2016a). Belgium plans 2 GW of offshore wind

by 2020 (CONCERE-ENOVER, n.d.) and had about 0.7 GW installed in 2014 (CONCERE-

ENOVER, 2015). In 2014, Belgium had already installed more than twice as many PV capacities

as were planned until 2020 according to the Belgian NREAP.

Belgium’s wholesale electricity market is gradually integrated into the Central Western Euro-

pean (CWE) region. Net imports accounted for 21.5% of electricity demand in 2014. Regarding

the market participants, Electrabel, the biggest company held around 66% of generating capac-

ities, resulting in a very high concentration index of the market (IEA 2016).

RES are primarily promoted through a quota obligation with tradable green certificates (TGC)

for suppliers with a system of tradable green certificates. Three different regional quota

schemes exist in Brussels, Flanders and Wallonia, all with technology-specific banding factors.

Under a quota scheme, the income stream from TGC is added to the income stream from selling

the generated electricity on the market. With TGC prices ranging between minimum prices of

65 €/MWh and fines of 100 €/MWh in case of non-compliance, and PV banding factors between

1.32 and 0.436 depending on installation size and region, PV installations can achieve support

levels of 40.5-132 €/MWh.

With its quota scheme, Belgium is not under the same regulatory pressure to introduce auctions

as many other Member States which to date are still applying instruments with administratively

set support levels. However, in Europe a general trend away from quota schemes and towards

FITs and FIPs (administratively set or auction-based) could be observed in recent years. While

auctions for large-scale PV are currently not the subject of political discussion in Belgium, for the

sake of this hypothetical case study we assume that Belgium may be willing to introduce auc-

tions in the future.

3.3 Design of a potential common auction

The following table lists some of the most relevant characteristics and design features which

need to be agreed on by the two participating countries before a common auction can be im-

plemented.

Table 4 Recommended characteristics and design features for a potential common auction

Characteristic/

design feature

Description

28

Objectives of

the auction

scheme

While the main intention of an auction scheme is to allocate support effi-

ciently, namely to the projects with the lowest generation costs, policy mak-

ers can seek to achieve secondary objectives with regard to a certain geo-

graphical distribution, actor diversity, positive effects on domestic industry

or labour markets, or system integration. These can be considered in the auc-

tion via various design elements, for instance by additional criteria in the auc-

tion or by pre-qualification criteria. Implementing secondary objectives is

usually a trade-off against efficiency, as projects are not solely selected on

the basis of price.

Geographical distribution is an especially relevant secondary objective in in-

ternational auctions, especially if the differences between LCOE in the partic-

ipating countries are big, as is the case in this study. It can be expected that

most or all winning PV projects would be located in Portugal. While it may be

cost-efficient to award projects in the least costly locations, this can be diffi-

cult to communicate politically and may also not be efficient from a system

perspective. Contingents can therefore be defined to ensure that a minimum

share of the target volume is awarded in Belgium. Different maximum prices

have to be defined for contingents, as explained further below.

Auction vol-

umes

Portugal has a large potential of low-cost PV potentials. Even though planned

deployment volumes until 2020 are low, it is a reasonable assumption that

with sinking LCOE, PV will become an attractive option for target achieve-

ment again for Portuguese policy makers in the medium term. Similarly, fi-

nancing PV installations in Portugal can also be attractive for Belgium. How-

ever, given the limited capacities installed to date, the Portuguese PV sector

is not very developed. If a reliable support scheme is set up, this will likely

attract project developers from other countries. Nevertheless, the auction

scheme should start with small volumes in order to build the PV sector slowly

while still ensuring sufficient competition. For instance, while 100 MW may

be a reasonably conservative volume for the first year of the auction scheme,

this could be scaled up to 300-400 MW/year within 3 years.

We assume that the two countries agree on a 30:70 distribution of generated

electricity because of the currently larger “distance to target achievement”

of Belgium. While Portugal will count 30% of produced PV electricity towards

its RES target, Belgium will use the other 70%.

29

Project sizes As low support costs are a main consideration in both Portugal and Belgium,

and as auctions are only suitable for large-scale bidders, we recommend re-

stricting the auction to large-scale free-standing PV installations. Germany

currently accepts projects with sizes of 100kW - 10MW in their pilot PV auc-

tions (Bundesnetzagentur, 2016a), a range which would also be suitable for

a common auction between Portugal and Belgium.

Ceiling price Ceiling prices are frequently applied in RES auctions and are strongly recom-

mended, especially in an immature market such as Portugal where the level

of competition is difficult to predict. Setting the ceiling price at a level that is

neither prohibitively low nor too generous is challenging, however. Ceiling

prices should be based on a detailed LCOE estimate. As shown in Figure 6, we

estimate that large-scale PV may cost around 55 €/MWh in Portugal in 2020,

while Belgium will have some locations with LCOE around 90€/MWh. For an

auction held in 2020, a ceiling price set at 10% above LCOE would thus stand

at 60.5 €/MWh. It is unlikely that any Belgian projects will be able to compete

at this price. Therefore, as mentioned above, it may be politically desired to

reserve a small share of the overall target volume for Belgian projects, subject

to their own ceiling price of 99 €/MWh.

Auctioneers

and contract-

ing authorities

An authority needs to be defined which will carry out the auctions. The win-

ners of previous auction rounds in Portugal signed PPAs with the Portuguese

energy regulator Directorate General of Energy and Geology (Direcção-Geral

de Energia e Geologia, DGEG), operating under the Ministry of Economics,

Innovation and Development (del Río, 2016). In Belgium, the separate re-

gional support schemes make the administrative landscape more complex.

Three authorities currently manage their respective quota scheme (res-legal,

2016):

BRUGEL, régulateur bruxellois pour le marché du gaz et de l’électric-

ité – Brussels Regulatory Authority for Electricity and Gas

Vlaamse Regulator van de Elektriciteits- en Gasmarkt (VREG) – Flem-

ish Regulator of the Electricity and Gas market

Commission Wallonne pour l'Energie (CWaPE) - Walloon Energy

Commission

A common auction could be carried out by a Portuguese or one of the Belgian

regional authorities. Alternatively, an authority on Belgian national level

30

could be defined or a newly created international authority could be respon-

sible for this task. Legal evaluations are necessary to assess whether an au-

thority in one country would be legally competent to require pre-qualification

documents and apply possible penalties to an installation in the other coun-

try.

Effort sharing

and payment

mechanism

The effort sharing arrangement must be negotiated between the two coun-

tries. Given that we assume a 30:70 allocation of generated electricity to Por-

tugal and Belgium, support expenditures could be divided according to the

same ratio. However, the arguments in favour of a different cost allocation,

as mentioned in the previous chapter, also apply here:

Firstly, regarding indirect costs and benefits, the additional system costs of

large amounts of PV have to be borne mainly by Portugal. On the other hand,

benefits such as labour market effects, local investments, and reduced air

pollution from replaced fossil fuel generation also remain there. Additionally

Portugal may face lower wholesale electricity prices which are beneficial for

consumers and a burden for conventional producers. Depending on how

highly these effects are valuated, compensation could be requested either by

Belgium or by Portugal.

Secondly, the willingness to pay is likely to differ for Belgium and Portugal. If

we assume that the majority of awarded PV projects will be situated in Por-

tugal, this is likely to reduce support expenditures for Belgium. The Belgian

willingness to pay will be determined by the support expenditures which

would be caused by installing its own low-cost RES (most likely onshore wind)

on their own territory, which may be higher than the prices awarded in the

PV auction. Portugal, on the other hand, would have relatively low support

expenditures in purely national auctions and may be worse off sharing its

lowest-cost potentials with Belgium, especially if the auction also contains a

more costly contingent for Belgian projects. Portugal may therefore have a

lower willingness to pay than the prices realised in the common PV auction.

On the other hand Portugal will attract additional investments and economic

activity as listed above and therefore profit from indirect benefits, which is

the main rationale for sharing its low-cost potentials.

Both options for the organisation of payment streams would be possible for

this common auction: Plants can either receive support payments from their

local DSO, and compensation payments are made at TSO level or between

31

the countries at the end of the year; or a common fund can be created out

of which support payments are then taken.

Periodicity of

auctions

The common auction scheme should adhere to a predictable and long-term

plan. The two countries should commit to these target volumes for at least

3-5 years and announce a reliable auction schedule. The regulator can retain

some flexibility by announcing only volume ranges for future rounds, and by

shifting some volumes between rounds to react to market developments.

Target volumes can be shifted between auction rounds in order to provide

some flexibility to the auctioneer.

For large-scale PV projects with a maximum size of 10 MW, the initial annual

auction volume of 100 MW can be split into two auction rounds throughout

the year. Later, when the annual volume is scaled up to 300-400 MW, three

rounds can take place per year. Auction rounds should be scheduled to take

place 2-3 times per year to avoid stop-and-go effects.

Type of sup-

port

For this common auction, we recommend a sliding FIP based on a 3-month

weighted average of wholesale electricity prices in Portugal and Belgium. Fig-

ure 7 provides a numerical example of PV power plant X’s remuneration un-

der different reference prices for two different time periods:

LCOE (€c/kWh) = bid price of wind power plant X

3-month average market value for PV plants (€c/kWh)

Average market value achieved by PV plant X (€c/kWh)

Support payment (€c/kWh)

Period a:

4.0

3.5

5.52.0

1.5

Belgium Portugal

Total remuneration of PV plant Xunder…Reference price Belgium: 3.7 €c/kWh (1.5+2.2)Reference price Portugal: 5.7 €c/kWh (3.5+2.2)Reference price average: 4.4 €c/kWh (2.2+2.2)

3.3

Weightedaverage

2.2

2.2

3.0

2.0

5.53.5

2.5

Belgium Portugal

3.2

Weightedaverage

2.3

3.4

Period b:

Total remuneration of PV plant Xunder…eference price Belgium: 5.9 €c/kWh (2.5+3.4)Reference price Portugal: 5.4 €c/kWh (2.5+3.4)Reference price average: 5.7 €c/kWh (2.3+3.4)

32

Figure 7 Example of plant remuneration under different reference prices

At least in the medium term, Belgian and Portuguese electricity prices can be

expected to diverge often, as interconnection capacities are a relevant bot-

tleneck, especially on the French-Spanish border. As shown in the figure, this

poses some risk to PV power plant X. We assume that this plant is situated in

Portugal. We further assume that the plant is able to achieve slightly higher

market values in period A than the average Portuguese PV plant (depending

on plant design and management, the opposite may be true for other plants

and other time periods). In case the Portuguese market value were used as

reference, the plant’s remuneration would thus be slightly higher than its

LCOE in period A. With the weighted average used as reference, however, the

plant gets paid a lower premium and ends up with a remuneration below its

LCOE despite having realised market values which were higher than those of

other PV plants in the same market area. In period B, average market values

in Belgium are lower than in Portugal. At the same time, plant X happens to

realise slightly below-average market prices compared to other Portuguese

PV plants. Because of the low Belgian market values, using the weighted av-

erage as reference is favourable for this PV plant, as it leads to higher support

payments. The total remuneration for our plant is higher than its LCOE, de-

spite it having achieved slightly below-average market values.

However, apart from this, the producers face no unproductive risk, thus mak-

ing this option more attractive than a fixed FIP. Risks to the two paying Mem-

ber States are also limited.

Auction for-

mat

Assuming auction target volumes in the range of several hundred MW, on-

shore wind projects are usually small in comparison and a number of projects

is thus needed to fill the volume. As onshore wind is a rather mature technol-

ogy, a large number of projects is typically in the development pipeline at any

given time. A multiple-item auction format thus tends to be more suitable

than single-item auctions. In multiple-item auctions, the auctioneer defines a

target volume and accepts all projects in order of their award score until the

volume is full.

Auction type Auctions can be static, meaning that each bidder submits one binding sealed

bid, or dynamic using an ascending or descending clock. Each type has its

benefits and drawbacks. In dynamic auctions, bidders can observe their com-

petitors’ behaviour and thus obtain information about them, decreasing the

risk of winner’s curse but also increasing the risk of implicit collusion. Static

33

auctions, on the other hand, are less complex and can therefore be more ap-

propriate for inexperienced auctioneers and bidders. While most auctions in

the RES sector so far have been of the static type, dynamic RES auctions exist

in the Netherlands and a hybrid type has been applied in Brazil (Förster and

Amazo, 2016).

The wind auctions previously held in Portugal were static (del Río, 2016). For

a hypothetical common auction with Belgium, we suggest a static type, as it

is less complex and as at least one of the participating countries already has

some experience with it.

Pricing rule Static multi-criteria auctions can have a uniform pricing rule, paying either

the highest accepted bid price or the lowest rejected bid price to all awarded

bidders; or a pay-as-bid rule in which awarded bidders receive different

prices. Again, both options have benefits and drawbacks. Under strict theo-

retical requirements, uniform prices (lowest rejected bid) are incentive-com-

patible, meaning that they incentivise bidders to bid at their true cost. In prac-

tice, however, these strict requirements are almost never satisfied. Uniform

price rules can lead to strategic supply reduction in case multi-project bidders

are present, and to irrationally low bidding, especially among inexperienced

bidders, thus possibly resulting in projects not being realised. Germany has

tested both price rules in its pilot PV auctions of 2015/2016, with very similar

outcomes (Bundesnetzagentur, 2016b).

We recommend that the common PV auctions start with a pay-as-bid rule.

Pricing rules could be changed in later rounds to observe the resulting effects.

Pre-qualifica-

tion criteria

and penalties

As for any RES auction, a careful design of pre-qualification criteria and pen-

alties are strongly recommended. All bidding projects should be required to

have grid access and construction permits in order to ensure that only pro-

jects with good chances of being realised can submit bids. All projects should

submit a first bid bond upon entering in the auction. Awarded projects should

be required to submit a second bid bond. Bid bonds are not to be returned in

case of non-realisation, thus ensuring that only serious bidders take part in

the auction.

34

3.4 Expected performance of a Portuguese-Belgian auc-tion scheme

This section provides a brief assessment of the hypothetical common auction with regard to a

number of assessment criteria.

Effectiveness

A well-designed common auction has the potential to achieve higher policy effectiveness than the

existing Belgian quota scheme and or the General Regime currently in place in Portugal. In order

to ensure good effectiveness, the auction scheme must, amongst others, follow a reliable and

predictable schedule to provide security to investors, and have well-designed pre-qualification

criteria and penalties in order to ensure that awarded projects are built within the realisation dead-

line.

In addition, barriers outside the auction must be removed or minimised. Especially in the case of

Portugal, this includes grid bottlenecks making it difficult to export electricity out of the Iberian

Peninsula.

Static efficiency

The common auction can be expected to have higher static efficiency than the Belgian quota

scheme. While a technology-neutral common auction would ensure that low-cost projects from

other technologies also get awarded, the static efficiency of a large-scale PV auction can also be

considered relatively high given recent LCOE developments.

Dynamic efficiency

With a predictable schedule for several years in advance, the common auction provides security

for investors and eliminates the majority of unproductive risks, thus incentivising further cost re-

ductions within the technology. Dynamic efficiency can therefore be considered higher than under

the Belgian quota scheme or the Portuguese General Regime. A common auction scheme may

also be perceived as less prone to retroactive changes than purely national auctions, thus further

improving investor security.

Distributional effects and minimisation of support costs

The common PV auction has the potential to reduce support costs especially for Belgium which

gets access to Portugal’s low-cost PV potentials which Portugal by itself would not fully exploit.

Actor diversity

Experience from the German large-scale PV pilot auctions indicate that a variety of actor types

participate, including cooperatives and other small actors (Bundesnetzagentur, 2016b). Actor di-

versity can be improved by reducing transaction costs and barriers for small actors, for instance

by providing simple, easily accessible information on the auction procedure online. Actor diversity

is expected to be similar to that under current Portuguese and Belgian policies. Potentially, actor

35

diversity may increase if for example Belgian project developers are attracted to become active

in Portugal if the design of the common auction considers elements that are suitable for Belgian

companies.

36

4 Policy Implications and General Recommendations

Member States should be given freedom to design their own auctions. Nevertheless, some best

practice design features should be included in the new RES directive. In this section, we there-

fore provide some recommendations on which aspects of auctioning should be regulated by RED

II and which should be left to Member States. These recommendations are partially inspired by

the case study analysed in this report and partially draw from the general policy debate also held

in EU research projects such as AURES and Towards20304. Many of the following recommenda-

tions apply to national as well as international auctions.

Requirements on type of support

The analysis in this study concludes that sliding FIPs are the preferred instrument for national

auctions, and most probably also to be preferred over fixed FIPs in international auctions. The

complexities caused by sliding FIPs in international auctions should be understood as a further

incentive to push forward market coupling and to increase interconnector capacities in order to

achieve increasing convergence between wholesale electricity prices. The latter could be

achieved by defining reference prices of sliding premium systems based on the average price of

the participating countries. Nevertheless, RED II should not contain a hard requirement to apply

sliding FIPs. Member States should be free to apply new and innovative types of support, as long

as they remain compatible with State Aid regulation.

Support should be designed so as to shield RES projects from unproductive risks but at the same

time ensure market integration. Mandatory direct marketing should be foreseen in the design

of the support instrument, and installations should have an incentive to cease production when

prices fall below the negative value of the support level per generated unit, which is the case for

FIP and investment grants.

RED II may recommend sliding FIPs, but should let Member States decide on the type of sup-

port they want to allocate via their auctions.

RED II can include a requirement that auctioned support payments should be designed so as

to incentivise RES producers to stop feeding electricity into the grid as soon as market prices

become lower than the negative value of support.

4 see forthcoming publications both by the Horizon2020-funded AURES project and by Ecofys based on research for the German Federal Ministry for Economic Affairs and Energy.

37

Technology specificity

Technology-neutral auctions lead to higher static efficiency in the sense that generation costs

are minimised if only the lowest-costs projects across all technologies are selected. On the other

hand, this approach does not necessarily select those technologies which lead to lowest overall

system costs. In addition, technology-specific support leads to better dynamic efficiency. Mem-

ber States may also want to conduct auctions in which technologies with similar LCOE compete

against each other. However, this makes it more difficult to set the parameters of the auction,

especially with regard to pre-qualification criteria and realisation deadlines, more difficult.

The new RES Directive should give freedom to Member States to implement technology-neu-

tral, technology-clustered, or technology-specific auctions.

Exemptions from auctions

Member States may want to exempt certain parts of the RES-E sector from auctions and apply

administratively set support instruments to them. This applies to mainly two areas:

Immature technologies which have still not achieved high market penetration rates or are

still in the demonstration phase; or small installations and/or small actors which fall under

pre-defined de-minimis thresholds

national markets which may be considered immature even if the technology in question is

already mature in other markets. If a national market is too small to lead to sufficient com-

petition in an auction, support levels may better be set administratively.

International auctions can be a way to combine a small market with a larger one in a different

country, thus making auctions feasible there. However, this should be a voluntary process and

not prescribed by RED II.

For those installations which are exempt from auctions for the above reasons, RED II should

define practices. These may for instance include LCOE calculation methodologies as the basis for

administratively set support levels, or regression of support levels based on automated formulas.

RED II should allow Member States to exempt actors from auctions if they belong to actor or

project size categories that are especially disadvantaged by auctions, or to immature technol-

ogies.

RED II should permit Member States to apply alternative support measures if an ex-ante fea-

sibility study finds that auction results will be poor in this specific market for a specific tech-

nology, regardless of installation size, type, or technology maturity.

RED II should define best practices for the support given to exempted segments.

38

Secondary objectives

While the bid price should be the main selection criterion in an auction, Member States should

be allowed to incorporate secondary objectives in their auction designs, concerning for instance

geographical distribution, labour market effects, actor diversity, or industrial policy. The most

relevant secondary objective for international auctions will most probably be the partial steering

of geographical distribution.

RED II should permit Member States to apply secondary objectives in their auction schemes,

provided that these are well-justified and that cost efficiency remains the main objective.

Auction design elements

While we suggest a static multiple-item auction with a pay-as-bid rule for the above case-study,

other options may be suitable for other cases. We therefore suggest that Member States should

be able to choose their own auction type, auction format, and pricing rule.

The exact scheduling of the auction is dependent on the technology, the specific market, and

the target volumes and should thus not be prescribed by RED II. However, Member States should

be required by RED II to submit an auction schedule over several years.

While the target volume is defined in terms of MW in the case study, Member States should be

allowed to choose between a capacity, generation, or budget volumes in their auctions.

Member States should be required to set a ceiling price above which no bids will be accepted in

the auction. In combination with the volume control inherent to auctions, this ensures predict-

ability of support expenditures for the regulator. While Member States should set the ceiling

price themselves, RED II should contain some guidance and best-practice examples on estimat-

ing LCOE and the related setting and period adjustment of ceiling prices.

Member States should be allowed to limit bidder concentration by defining a maximum share

of awarded projects per bidder per auction round.

The design of pre-qualification requirements and penalties is crucial for the success of an auc-

tion. RED II should require Member States to require both material pre-qualifications (for in-

stance construction and grid connection permits) as well as material pre-qualifications such as

bid bonds which will be kept by the auctioneer as a penalty in case a project is delayed or fails

to be realised. The exact design of these elements, however, is very case-specific and should be

the responsibility of Member States. Member States should be required to provide arguments

for their pre-qualification requirements to prevent unjustified exclusion of certain actor or pro-

ject groups.

While it is in principle possible to trade the support rights after having won them in an auction,

Member States should be allowed to limit such transferability if they wish.

39

Auction rules should be flexibly adaptable by Member States. RED II should give guidance on

certain design elements such as ceiling prices and auction periodicity. It should require Mem-

ber States to include penalties and pre-qualifications in their auctions, but not prescribe a

specific design.

International auctions

The opening of auctions is a complex endeavour which can lead to economic benefits if designed

well. However, in some Member States it can be politically difficult to communicate. Fears of

being forced to open their support scheme can lead national decision makers to very cautious

policies, thus negatively influencing the effectiveness of even national support schemes. Mem-

ber States should therefore explicitly be allowed to determine the degree and timing of a possi-

ble opening by themselves. RED II can encourage Member States by providing detailed descrip-

tions and guidelines on opened auctions.

RED II should not prescribe the time and degree of opening of auctions. However, it can make

the opening process easier for Member States by providing a description of options.

Accessibility of auctions

When preparing auction rounds, Member States should be required to set up appropriate pre-

paratory processes involving stakeholders. RED II can give guidance on such processes, i.e. time

lines for consultation processes, bid preparation, project realisation times, warning mechanisms

for delays, etc.

Once auctions are implemented, REDII should require that adequate participation-enhancing

measures are taken. REDII may provide examples for these measures, including English language

tender materials, international stakeholder dialogue meetings, easily accessible web-based auc-

tion portals, etc. This is especially relevant in mutually opened auctions.

RED II should require Member States to take measures that enable stakeholders to participate

in the design of auctions and have easy access to auctions.

Retroactive changes

40

Retroactive changes have been shown to cause disruptions in RES markets and to severely re-

duce investor confidence in the past. It is one of the clearest lessons from RES policy in past

years that such changes should be avoided. This applies equally to auction schemes. Interna-

tional auctions may be perceived by investors to be less likely to be changed retroactively, as at

least two Member States need to agree on such changes. Nevertheless, we recommend that

RED II specifically require Member States to avoid such situations.

RED II should include a clause which forbids Member States to implement retroactive

changes.

41

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