Europe’s auctions of power purchase contracts for renewable energy are being hailed as policy successes for bringing down the cost of electricity. But the focus on awarding contracts to the lowest bidders among established technologies risks blocking market access for less developed forms of renewable energy and preventing them from reaching their potential

On the face of it, competitive auctions of renewable energy contracts seems to be a policy that is truly working in Europe as a replacement for the fixed-price power purchase subsidies of the past. Regular tenders offering long-term contracts are proving to provide investment certainty and are triggering the development of cheap and even subsidy-free renewables. Bringing clean energy to the grid at the lowest cost for governments and consumers is at the heart of most European auction and tender markets. But this approach comes with some challenges, not least the impact it may have on nascent renewable technologies. Under the rules of the single European energy market, EU member states have been required since 2017 to introduce competitive tendering procedures to determine the level of operational support granted to renewables installations. These procedures, or auctions, are either technology neutral, whereby all renewable technologies compete for contracts against one another on the basis of cost, or focused on specific technologies. Under EU guidelines, competitive bidding procedures should in principle be technology-neutral unless such an approach were to lead to suboptimal results because of, for instance, network constraints or diversification needs, in which case bidding processes can be technology-specific, says a report by the Council of European Energy Regulators (CEER) published in June 2018. The report shows that by the end of 2017, 18 out of 29 European countries had introduced tendering schemes or were about do so. The report examines data from its member countries, hence Slovakia is excluded from the EU28, while Norway and Iceland, countries outside the EU, are included in the report’s analysis. Poland, Portugal, Spain, the Netherlands and the UK had opted for technology-neutral auctions, with others countries, including Denmark, France, Greece, Hungary and Germany, planning to follow suit. The report concludes that: “Where empirical evidence is available, the level of competition and the price developments have been positive, demonstrating the cost-efficiency of tenders for mature renewables technologies.” It warns, however, of a lack of “empirical evidence” demonstrating the success of competitive tenders for other less market-ready technologies. Until more is known, a question mark hangs over the effectiveness of tendering as an instrument to deliver on the decarbonisation agenda, states the CEER. The propensity for auctions to favour mature over nascent technologies is causing some to be concerned. “In general, it is not ideal to only support the currently most cost-competitive technology,” says Sven Utermoehlen, chief operating officer of E.ON Climate & Renewables. “Other aspects not easily reflected in an auction price need to be taken into consideration, for example, the effects on security of supply and grid integration.” Variability of supply can otherwise become a big issue and having “the right mix between different renewable technologies is important”, he adds.

Danish example

Enter Denmark, which in 2017 generated 43% of its electricity needs from wind power and around 3% from solar PV. Michael Madsen, an adviser at the Danish Energy Agency, believes this balance needs to change if the country is to meet its 100% renewables target by 2050. “I think solar PV will play an important role. We need diversification of the energy mix and we need something to fill the gap when the wind doesn’t blow.” In 2018, the country decided to launch multi-technology renewables auctions from 2019 that are planned to run on a yearly basis until 2024 and that place solar and wind in direct competition. Which technology will benefit most is a “very difficult” question to answer, says Madsen. But if the results do not help contribute to a more diversified energy mix, the auction structure might need to be re-evaluated, he adds. One of the aims of Ireland’s Renewable Electricity Support Scheme (RESS), approved by the government in July 2018, is to help diversify the country’s renewable energy mix and offer support to offshore wind and solar. Onshore wind is currently by far the largest source of renewable energy in Ireland. The solar industry remains concerned about how much it will benefit from the new system. “The out-turn of such a [technology-neutral] auction is likely to be largely onshore wind, which will not achieve the stated policy goal of diversity,” says the Irish Solar Association in a response to a consultation on the RESS policy. The industry could, however, benefit from the government’s call in the initial tender for “shovel-ready” projects ready to come online in 2020. While solar photovoltaic may be more expensive than onshore wind, solar farms are much quicker to install.

Vocal minority

Concerns about real or perceived public resistance to wind turbines can also make diversification an attractive proposition. “We’ll drive into the ceiling in terms of space and social resistance if we don’t diversify,” says Conal Bogall from energy consultancy Cornwall Insight. Madsen highlights that Denmark’s energy agreement, published in June 2018, stipulates that the current number of around 4300 onshore wind turbines will be reduced to a maximum of 1850 in 2030. The agreement says this is in light of falling offshore wind costs, meaning the country can rely more on this technology, and that it “recognises the experiences of Danes who have experienced inconveniences caused by wind turbines near their homes”. The latter assertion could be seen as little more than political posturing. A 2015 survey shows 92% of respondents supporting the continued development of wind power in Denmark and since modern turbines are larger and more productive than those that will be removed or repowered, this is unlikely to have an immediate impact on the renewables capacity in the country’s grid. It does mean, though, that Denmark currently has a new cap on how much onshore wind power it can operate and will need to turn to offshore wind and other technologies for additional power needs, says Madsen. Opposition by a vocal minority to onshore wind has significantly impacted the results of the UK’s Contract for Difference (CfD) auctions, which today are reserved exclusively for offshore wind. Introduced in 2014, CfD auctions were split into two categories, one for “established” technologies like onshore wind and solar and another for “less established” projects such as offshore wind, advanced waste conversion technologies, wave and tidal power. After one auction round the government effectively stopped providing CfDs to established technologies. “The Conservative government ruled out further deployment in England in their last election manifesto,” explains Mike Thompson, head of carbon budgets at the UK Committee on Climate Change, an independent body that advises the government. ”Even though overall public support for onshore wind is quite high, the politics have proven difficult,” he adds.

Emerging technologies

Is it unclear, however, whether by continuing to mainly support offshore wind, the UK CfD scheme can trigger enough additional capacity for the UK to decarbonise its economy. “Possibly, is the answer at the moment,” says Thompson “We might meet our 2030 targets with offshore wind and nuclear, but it will be harder and more expensive if we don’t allow onshore wind and solar” to be included in the auctions, he adds. The success of offshore wind in the UK is also effectively pushing out nascent and more expensive technology from the auctions that could bring future rewards. Tidal and wave power will never succeed if they are made to compete directly with onshore or even offshore wind, says Thompson. The UK government seemed keen to support the tidal sector until it concluded the technology was too costly compared with other alternatives as offshore wind costs plunged, and many believe it is time to focus again on this sector. The UK has the potential to bring 10 gigawatts (GW) of tidal power online by 2025, says Stuart Bradley, from Energy Systems Catapult, a UK government public-privately funded research and innovation institute. Tidal power is less variable than wind and solar, and it would make sense to invest in the technology to help manage the variations in output, particularly between night and day, of the UK’s 12 GW solar fleet, he adds. Tidal project developers, including SIMEC Atlantis Energy, which boasts a portfolio of UK tidal stream projects of over 300 MW, and Tidal Lagoon Power, the developer behind the planned £1 billion Swansea Bay Tidal Lagoon and a pipeline of other lagoons in the UK, have hit out at the UK government for holding back subsidy support for large-scale tidal. The industry is showing “a great deal of promise” and is supported by research and development (R&D) funding and local funding by the Welsh and Scottish governments, but will need subsidies to take off at scale, says Bradley. Some projects are not ready to win power purchase contracts in competitive markets and are more suited to grant funding and an R&D approach, but CfDs should be available for tidal and wave technologies that are ready to scale up, adds Thompson. For an emerging technology to be subsidised on a large scale, it has to be clear that the support mechanism supports further cost reductions to the extent that the technology can at some point reach grid parity, says Utermoehlen from E.ON. It also needs to be possible to trial the technology at enough development sites to show it can contribute significantly to the energy mix. “It is worth paying more for a shorter period of time for emerging technologies,” says Thomson. “We signed contracts at £150 (per MWh) for offshore wind to get it where it is today. It allows the industry to scale up and the financing sector to get more comfortable with the technology — this is all part of reducing the costs of low-carbon energy.” Lowest cost offshore wind is now contracted at less than £60/MWh.

Writer: Elza Holmstedt Pell