The introduction of renewables auctions in Germany, replacing administratively set feed-in premiums, has led to considerably lower prices and very high realization rates. However, community participation was very low in the first solar PV auctions. Now a new rule favouring community projects in onshore wind auctions turned out to be so attractive that most bidders created community projects to profit from them. This is turning the market upside down. Corinna Klessmann and Silvana Tiedemann of consultancy Ecofys, a Navigant company, look at the effects of auctions on the German renewables markets and make recommendations.
Three years ago, in response to the updated European State Aid Guidelines and to increase the market integration of renewables, Germany announced a switch from feed-in tariffs to auctions as the principal support scheme for renewable electricity. Starting with a pilot auction for ground-mounted solar PV in 2015, the country has introduced further auctions for wind onshore, wind offshore, and biomass this year. Looking at Germany’s experience with auctions so far, what are the main take-aways and lessons learnt?
100% Realization rate
There is no doubt about it: auctions have been successful in driving down costs. Within less than two years, the prices for solar PV fell by almost 40% from 9.2 to 5.7 cts/kWh. Auctions turn out to be faster and more flexible than administrative procedures in adjusting support levels to cost reductions. In the past, even a built-in automatic adjustment mechanism was not always sufficient to avoid high costs for consumers.
Yet despite these cost benefits, questions were raised in the media whether the projects would actually be realized. Successful bidders have up to two years to realize their project and critics wondered whether the winning projects would ever be built.
Past experience, for example in the UK and in Brazil, has shown that ensuring high realisation rates is one of the major challenges when designing auctions
It therefore came as a surprise to some when in May 2017 the regulator announced a realisation rate of 100% for the first auction round. All projects had been implemented before the final deadline passed. Only one bidder had been penalised for building a slightly smaller project than originally envisaged. A very positive result that has helped to remove one of the key objections raised against auctions in general.
This was not a given: past experience, for example in the UK and in Brazil, has shown that ensuring high realisation rates is one of the major challenges when designing auctions.
Several elements were essential in bringing about the 100% result in the German case:
- Bid bonds: i.e. financial guarantees of €25–50/kW that bidders must provide at the time of the auction. These bid bonds back the financial penalties for delay and non-realisation of projects. That way, a 1 MW project would have to pay €50,000 penalty, for example.
- Pre-qualification: bidders had to meet certain pre-qualification requirements, e.g. to prove they had the local municipality’s consent for their projects.
- Flexibility: against a small fee, bidders were entitled to change the site of their project, i.e. they were not bound to the site indicated in their bid.
Yet there was one criticism that the first auctions did not manage to overcome: the difficult access for local energy cooperatives and community projects. The requirement of financial guarantees and the higher risk associated with auctions compared to FiTs make it more difficult for small actors and cooperatives to participate in auctions. They can still get involved indirectly, e.g. by cooperating with a project developer, but it is not known whether such involvement has occurred.
Until today, no cooperative was visibly successful in any of the PV auctions over the last two years. Most auction winners were professional project developers. This is not a major problem for the German PV market, as communities can still choose to build smaller plants below 750 kW that still receive the set feed-in tariffs.
The special rules turned out to be so attractive that almost all winning bids in the German onshore wind auction (93%) were community projects!
In the German wind market, however, community projects play a more important role, and small wind parks are not exempted from auctioning.
Hence, the German government, to ensure a greater diversity of bidders and greater involvement of local communities, introduced special rules for community wind power in its first onshore wind auction, which was held in May 2017.
The involvement of local energy communities to ensure local acceptance is an important political goal in Germany, especially for onshore wind energy. This goes back to the 1980s and 1990s, when grass-root cooperatives pioneered the wind power development in the country. Today, the German wind market is characterised by a variety of large and small project developers, but energy cooperatives have managed to keep up under the feed-in tariff scheme.
The preferential auction rules, which apply to cooperatives of at least 10 individuals and where local citizens hold the majority of voting rights, are as follows:
- Lower qualification requirements: while other bidders must present a permit according to the Federal Emission Control Act (which is a lengthy and expensive step which stops many projects), energy communities can participate without this permit. They also benefit from lower financial guarantees (bid bonds) than regular projects (15€/MW instead of 30€/MW at the time of the auction).
- Longer realisation period: reflecting that community projects might be less developed at the time of the auction, their realisation period is two years longer than the regular one which lasts for thirty months.
- Preferential price rule: while other bidders get the price they bid (“pay as bid”), community projects get the clearing price (“pay as cleared”). The clearing price is the price of the highest successful bid of an auction round and therefore usually higher than the individual bid.
So what were the results? First of all this auction again delivered good results in terms of cost reductions: the average price of 5.7 cts/kWh of the winning bids was substantially lower than the maximum price of 7 cent/kWh.
What is more: the special rules turned out to be so attractive that almost all winning bids in the German onshore wind auction (93%) were community projects!
The intention behind the local energy community rule was to protect a niche market, but in practice it seems nearly impossible to find a robust definition of what community energy is
This looks like a resounding success. Yet upon closer inspection, the results may not be quite as positive as they seem.
Although the rules managed to incentivize community participation, it is not clear whether this will increase local acceptance. A substantial number of the winning “energy communities” appear to consist of employees of professional project developers, who managed to gain an advantage by working with a cooperative.
Furthermore, the realisation rate could turn out to be substantially lower than in the PV auction. The inherent risk of non-realisation for projects not having a permit is substantially higher. Bidders do not face meaningful penalties which reduces their incentive for setting up risk mitigation strategies. Combined with the longer realisation period, this decreases planning certainty for manufacturers, but also puts the wind onshore expansion target of the government at risk.
The special rules for communities also create substantial disadvantages for other bidders. It is not unlikely that many project developers will create energy communities in the future to benefit from the advantages.
Lessons to be learned
We derive the following lessons learnt from the German experience which may also help to inform the discussion of the new EU Renewable Energy Directive for the period after 2020 (RED II), which includes an article on energy communities.
The intention behind the local energy community rule was to protect a niche market, but in practice it seems nearly impossible to find a robust definition of what community energy is. This is what makes it so difficult to protect these actors against other market participants without giving the latter the incentive to create equivalent business models to benefit from the preferential rules.
We therefore recommend to make sure that possible incentives for local participation do not have negative effects if used by all bidders. A bonus for community involvement, for example, would incentivize such involvement, but have no negative effect when all bidders aim to benefit from it.
Focusing on ownership rather than project development is another way to engage with communities and enhance local acceptance
At the same time, it is not clear whether preferential conditions in an auction are the best way to promote community energy in the first place. Instead of creating competition between projects, such rules risk of turning the auction into a competition between different auction rules.
Alternative options to support community bidders could start with measures outside of the auction, e.g. providing small bidders with access to cheap finance or enabling aggregator models.
Focusing on ownership rather than project development is another way to engage with communities and enhance local acceptance. In Denmark, project developers are obliged to offer certain project shares to the local municipality, once the wind farm has been built.
Overall, the German experience with renewables auctions shows that they can be a powerful tool to help meet the renewable energy targets at low cost. To meet additional policy goals, the auction design needs to combine the right elements for the specific market context. Achieving all policy goals via preferential auction rules, however, may not be the best option. Measures outside of the auction are likely to be better suited to foster community involvement in renewable energy projects.
Corinna Klessmann (PhD) is an Associate Director at Ecofys. She is an international expert on renewable energy policy and coordinates this knowledge area within Ecofys. She has consulted the German government on the auction design for solar PV, wind onshore and wind offshore and analysed the international experience with renewable energy auctions and other support schemes across the world, for the European Commission and IRENA among others.
Silvana Tiedemann (M.Sc.) works as a senior consultant at Ecofys. She is an expert on renewable energy support schemes and market integration, as well as electricity markets in Europe. She is currently working extensively on designing, evaluating, and guiding companies to participate in auctions and tender mechanisms for renewable energy, CHP plants, and energy efficiency measures.
Ecofys (@Ecofys) is a leading consultancy in energy & climate policies and part of Navigant’s global energy practice (@NavigantEnergy).