Poor responses to renewable energy tenders are leading to questions over European auction design
POOR TURNOUT
Developers were put off bidding in European tenders during 2022because strike prices failed to account for inflation
NEW CRITERIA
In offshore wind, where developers have no alternative togovernment auctions, non-price criteria are starting to emerge
KEY QUOTE
We need to get the auctions filled
There is no getting away from the fact: 2022 was a terrible year for renewable energy auctions in Europe. Lawmakers pressed for a rapid buildout of clean energy to replace the loss of Russian oil and gas resulting from the war in Ukraine. But as auction after auction yielded disappointing results it was clear investors were not playing ball.
The auctions’ failure to deliver much-needed renewable energy capacity has put industry groups on alert and led to questions over whether a current focus solely on economic criteria is too restrictive. To meet Europe’s climate targets, “We need to get the auctions filled,” says Christoph Zipf of the industry body WindEurope.
Auctions are certainly not being filled. In Italy in 2022, the year kicked off with more than 3.3 gigawatts (GW) under the hammer. This was capacity left over from seven previous auctions rounds held under a 2019 decree called FER1. According to press reports, only 306 megawatts (MW) of utility-scale solar and wind were handed out, marking the eighth Italian contest in a row that was undersubscribed.
Italy would go on to hold another lacklustre auction later in the year, offering more than 1.9 GW and securing just over 413 MW.
Soon after, Spain held a technology-neutral auction for 3.3 GW and awarded just 50 MW. The fiasco came after the Spanish government failed to attract a single bid for 220 MW of concentrated solar power capacity, despite having a national integrated energy and climate plan that calls for 2.5 GW of the technology by 2025.
It was not just Mediterranean countries that failed to meet auction expectations. December 2022 saw Austria putting almost 900 MW on the block but awarding a little over 444 MW. Croatia, France, Greece and Poland also held undersubscribed auctions.
WANING INTEREST
The lack of response primarily affected the onshore wind and solar capacity. It seems developers were put off entering the tenders due to a combination of longstanding permitting challenges and overly aggressive cost assumptions on the part of lawmakers.
Waning interest in government auctions is a problem because they are seen as the main route for European Union (EU) member states to secure the renewable energy capacity that Europe needs to accomplish its climate goals.
Having largely phased out early subsidy schemes such as feed-in tariffs, European governments now predominantly procure renewable energy through reverse auctions that often use a contracts for difference (CfD) pricing model.
CfDs encourage clean energy investment by giving investors access to a secure, fixed, long-term revenue stream. At the same time, the generator is free to sell any electricity produced outside of its CfD arrangement. Such sales, for instance through spot markets or corporate power purchase agreements (PPAs), may be more profitable than CfDs but are also more volatile.
In recent years, renewable energy groups have tended to bid low in government auctions with the aim of securing a CfD that can act as a basic revenue stream, to be later topped up with other sales.
TARGETS THREATENED
WindEurope’s Giles Dickson believes renewables targets will be missed if auctions are left unfulfilled
RISING COSTS
This has helped countries such as Portugal to achieve record-low rates for solar energy and has encouraged authorities to keep reducing the strike prices below which auction participants are expected to bid. The situation works well as long as wind and solar energy keep getting cheaper to produce, but this did not happen in 2022.
Instead, supply chain problems and inflationary pressures saw the cost of onshore wind rise 7% and fixed-axis solar climb 14% year on year, according to June 2022 figures from the analyst firm BloombergNEF. “These developments led to the average wind turbine being 30% more expensive than it was two years ago,” adds Zipf.
Despite the rising cost, renewables remained far cheaper than fossil fuelled generation last year—but it no longer made financial sense for many renewable energy developers to bid for the contracts on offer in European auctions. In Spain, the authorities do not seem fazed, despite having handed out less than 6.4 GW of the roughly 10.1 GW offered through auctions in 2021 and 2022.
“The result of these auctions does not affect the course set out in the National Integrated Energy and Climate Plan,” says Xira Valdés Villazón of the Spanish Ministry for the Ecological Transition and the Demographic Challenge. “Other technologies, such as [solar] self-consumption, are developing more quickly than expected and the government has room to secure a perfectly manageable renewable electricity system with lower prices than now,” she adds.
MARKET OPTIONS
Figures from APPA Renovables, a Spanish renewable energy association, show the country installed a record 8.3 GW of renewable capacity in 2022. Plus, the Spanish administration has already permitted 28 GW of renewable energy this year, giving it more than enough capacity to meet its annual targets, Valdés says.
What is happening instead is that project owners are steering clear of government auctions. “Developers believe they can get a better return for their investments if they sell their energy directly on the [merchant] market or through PPAs,” says Valdés.
The auction calendar is there to provide certainty for investors. “But that does not mean it is necessary to allocate all the installed capacity in each auction,” she adds.
Capacity that is not awarded in an auction can be carried over to the next one, she adds, and the Ministry can opt to add more auctions to the calendar if needed—something that happened in Spain in 2021 and Italy in 2022. “For the energy transition, we need to install renewables irrespective of how they make money,” says Valdés. “The auctions the government organises look to provide certainty to investors without preventing other ways of generating revenues.”
Not everyone buys into this thinking, with the Spanish business paper El Economista warning in November 2022 that Spain’s auction problems would see the country failing to meet most of the clean energy objectives it had set for 2030. Rolling spare capacity over from one auction to the next may help overcome a temporary mismatch, “But if you don’t solve the underlying problems, it just gets ridiculous,” Zipf says.
Furthermore, even if Spain can meet its renewable energy installation targets thanks to plants funded through merchant sales and corporate PPAs, that does not necessarily mean other EU markets could follow suit. In terms of PPAs, “the Spanish market is established and works well,” says Zipf. “Some other markets have hardly seen any PPAs yet.”
NEW MEASURES
Although a corporate appetite for clean energy supplies is leading to more and more PPA activity, WindEurope has told the European Commission that a credible auction scheme is essential to the energy transition.
The Commission has taken steps to improve matters. Its REPowerEU strategy, rushed out after Russia invaded Ukraine in early 2022, aims to reduce the EU’s reliance on Russian fossil fuels by boosting clean energy output.
One of the main ways it aims to do this is by simplifying and speeding up project permitting, which has long been recognised as a major problem for European renewables deployment. “A wind turbine project onshore takes on average about five years to get a permit in Europe, which of course is too long,” says Zipf.
Red tape was seen as dragging down auction results even before pricing became a serious issue. A case in point is Italy’s FER1 auctions, where bidders were deterred by slow-moving bureaucracy. “Italy is Europe’s prime example for how bad permitting leads to low renewables build-out,” WindEurope boss Giles Dickson said in a February 2022 press note.
“Neither the EU’s renewables target for 2030 nor Italy’s national targets for wind energy count for anything if there aren’t enough permitted projects that can bid into the auctions,” he said. “The latest undersubscribed auction shows once again that Italy urgently needs to fix its permitting arrangements. No other European country has more problems in permitting new wind farms than Italy.”
PERMITTING IMPROVEMENTS
The REPowerEU package aims to overcome such challenges through a package of measures, such as setting a two-year permitting deadline for greenfield projects and one year for repowering work. The regulation should also help permitting procedures become more robust, so approvals are harder to overcome through legal challenges.
“The European Commission has now said the expansion of wind energy is a matter of overriding public interest,” Zipf says. “If you have this enshrined in law when you get an appeal, the courts will be more likely to rule in favour of your project.”
Early indications are that the measures could help make a difference. In Germany, the first European nation to transpose REPowerEU into its national law, a Mecklenburg wind farm operator has successfully sued the state permitting office for dragging its feet over issuing a permit.
Elsewhere, “Member states have to implement all these helpful provisions that the EU has proposed,” Zipf says. “The member states understand they have to solve these problems if they want to get anywhere close to the targets they have.”
Nevertheless, industry bodies and sector leaders are keen for more to be done, particularly after renewable energy investors faced revenue cuts from electricity price caps introduced in 2022 to protect consumers against soaring utility bills. There is also unease over how European clean power procurement could be affected by two EU legislative packages.
STALLING PROGRESS
One contains proposed changes to the electricity market design and the other is a Net Zero Industry Act that is Europe’s response to the Inflation Reduction Act (IRA) in the United States. The IRA is North America’s most ambitious clean energy support package and there are concerns it could divert renewables investment away from Europe.
To keep Europe on track, “We need investor certainty,” said José Ignacio Sánchez Galán, of Spanish energy group Iberdrola, in a March 2023 press note issued by WindEurope. “The EU installed 16 GW of wind in 2022, only half of what’s needed to deliver on REPowerEU,” he said.
Sven Utermöhlen, of RWE Renewables, noted that European investments in wind power fell from €41 billion in 2021 to just €17 billion in 2022. “We saw no final investment decision in any offshore wind farm last year,” he added.
For Jochen Eickholt of wind turbine maker Siemens Gamesa Renewable Energy, one of the problems of Europe’s current auction system is that it focuses too heavily on price. “To deliver on an energy transition made in Europe we need auctions that do not focus on price only,” said Eickholt in the press note.
“Auctions need to reward the actual value of a European renewable energy supply chain: security of supply, sustainability, technological innovation, recyclability and engagement with local communities,” he said.
GHOSTED Project developers are finding alternative routes to market instead of using auction programmes
OFFSHORE WIND
Curiously, Europe already has renewable energy auctions where such non-financial criteria are starting to be applied—and they are a roaring success. To find them, you need to look offshore. In offshore wind, developers must first bid for a patch of the ocean upon which to build their projects. These are lease area auctions. Then they must bid again in government tenders to secure the support payments for the energy that will be produced by the wind farms.
In both cases, bar one tender in Turkey that did not go as planned, “they are significantly oversubscribed,” says Søren Lassen of the analyst firm Wood Mackenzie. “You’ve seen more and more players sign up.”
Wood Mackenzie expects $1 trillion to flow into the offshore wind industry over the next decade, with much of that money going to Europe. Admittedly, the offshore wind market is different to onshore renewables. Most importantly, all the sites available for development are owned by the state, so taking part in government auctions is a prerequisite to developing projects.
Furthermore, there is only a limited number of lease areas and the scale of the projects is so vast that it only takes a few wind farms to fill up the capacity tendered at any point in time. This makes it easy for offshore wind auctions to be oversubscribed, Lassen says. “Many of these tenders only need one winner,” he says.
“If you have 20 or 30 companies lined up, five, ten or 20 could not bid and still it would be a success, from the perspective that you got capacity within the agreed price range,” says Lassen.
ZERO-SUBSIDY AUCTIONS
Traditionally, offshore wind energy procurement has been based on a contract for difference model like that used onshore. As with onshore auctions, some players have refused to take part in recent offshore tenders because the prices on offer were not worth the effort, says Lassen.
In some cases, though, developers have placed ultra-low bids simply to gain access to lease areas. This has led to the emergence of zero-subsidy tenders in Denmark, Germany and the Netherlands. In zero-subsidy auctions, developers get nothing for their contract for difference but can sell their energy to the merchant and corporate PPA markets.
“Because there is this very intense competition, developers have been bidding at the floor in these tenders,” says Lassen. “If the floor is zero then you’re seeing zero bids because the developers know that ‘If we don’t bid zero, we might as well not bid, because someone will bid zero.’”
NON-PRICE CRITERIA
Some European offshore wind auctions have seen developers go a step further and accept negative subsidies—that is, they commit to paying fees to the government for the right to a lease area and operating licence. Not having to pay for contracts for difference is a massive win for governments, but it also poses a problem. If all the bids in a reverse auction are coming in at zero, you cannot use pricing criteria to choose winners.
“Then it’s not just about price,” says Lassen. “It becomes very interesting for the industry. You don’t have this race for the bottom where you’re in open war, dropping your revenue and impacting margins.”
In May 2022, Wood Mackenzie declared that “a new set of factors beyond the bidding price is emerging” in offshore wind.
Since 2019, it said, four new parameters had started to gain importance in offshore tendering. These are local content, systems integration, ecological mitigation and sustainability. The degree to which each parameter, including price, is valued varies by market.
Danish and German lawmakers value systems integration more than price, while in Norway, Sweden and Finland the situation is reversed, according to Wood Mackenzie.
Non-financial criteria are already increasingly applied in the corporate PPA market, says Lassen. Corporate off-takers are keen to get a good deal on electricity but may insist on other points, such as developer firm gender diversity, to comply with environmental, social and corporate governance goals.
Smoothing out permitting problems and adding non-financial criteria into the auction mix seems like a good way of bringing developers back to onshore government auctions. However, offshore wind dynamics only have a limited bearing on onshore tenders because in the latter the participants always have the option of bypassing the government altogether.
RIDE THE WAVE
The offshore wind sector has seen a series of successful auction rounds
FUTURE REQUIREMENTS
This means that to attract more players to onshore auctions, “it’s a question of making sure what you are offering is not just good, but also better than what else is out there,” says Lassen.
For now, it may suit governments such as that of Spain to let the market source the renewable energy capacity it was originally going to be procured through auctions. In time, however, there may be a need for a more controlled, prescriptive approach, by making sure there is standby capacity on hand to deal with prolonged periods of low wind and solar output.
As Europe looks to overhaul its electricity market design and build an industrial base to keep pace with that of North America, it will clearly want to get value for money—but the future may increasingly be about factors other than cost. •
TEXT Jason Deign ILLUSTRATIONS Bernardo França PHOTO Sana Ulla