Rethinking Renewable Energy Auctions: Revenue Stabilisation Instead Of Support Payments

Abstract

Market-based, competitive bidding processes, i.e. auctions, are becoming a dominant policy instrument for securing future electricity production from renewable energy sources (RES). The use of auctions to selecting the most competitive RES projects for support has spread from a few implementations in the early 2000s, to over 80 countries by the end of 2017 (REN21, 2018). However, the dramatic drop in technology cost of wind and solar energy projects over the last years raises expectations that RES projects become independent of support payments within the next decade. This may seem to make auctions (in their function of allocating a support price) as policy instrument less relevant for the future. We have already seen zero-subsidy bids for sliding premiums in German and Dutch offshore wind auctions. A six-fold drop in support levels in the 2018 Danish multi-technology auctions led to onshore wind and solar energy projects receiving only expectedly 3-7% of revenues from support (fixed premiums). Indeed, in 2017 as much as 50% of new wind capacity in Europe was already partly exposed to market price risk (WindEurope 2018). This paper proposes that even if support payments become less relevant for project profitability, auctions can still remain a valuable policy instrument for future RES deployment. This is, because full market exposure will possibly remain a deal breaker for some RES project developers – not because of the lacking prospect of sufficient revenues, but because the exposure to uncertainty and price volatility requires additional measures to assure debt service (Gerhard et al, 2015). This makes project financing complicated, expensive or even impossible. Already today, certain RES developers turn to securing cash-flows and stabilising revenues through alternative options, especially private power purchase agreements. Other market players, such as independent power producers or energy utilities, may not be hit as hard by the exposure as they can better balance risks in their portfolio. We argue that because of the paradox in renewable energy policy (Blazquez et al., 2018) there is a natural role for goverement to mitigate policy driven impacts and ensure a certain kind of revenue stabilisation. Several economic reasons point towards the government as appropriate counter-party for such assurance (e.g. high risks during the setting up and growth phase of assurance systems), while others point against it and show potential pitfalls (lacking signal through market prices, conflict of interests).