Best practice design elements 6th CA_RES II Plenary Meeting Vienna 18-19 May 2016

Bridget Woodman, Oscar Fitch Roy

University of Exeter

b.woodman@exeter.ac.uk

AURES Auctions for Renewable Energy Support •  EU Horizon 2020 research project on auction designs for renewable

energy support •  The overarching aim of the project is to promote the effective use and

efficient implementation of auctions for renewable energy support in the European Union Member States, especially regarding their cost-efficiency.

•  Its main activities are: •  To generate new insights on the applicability of auctions for renewable support and

on specific auction designs •  To provide tailor-made policy support in implementation of auctions •  Facilitate knowledge exchange between stakeholders

www.auresproject.eu

Aims and outline Aims: •  To introduce audience to key functions of

auction design options •  And the choices that policy makers face

Outline: •  Some criteria for thinking about RE policy –

what makes it ‘good’? •  Design elements of auctions

•  Outline and some pros and cons •  Some other issues to think about

•  Trade offs and appropriateness

Effec%ve  Levels  of  deployment  %  genera%on  etc  

Efficient/cost  

effec%ve  

Sta%c  (reaching  the  target  at  the  lowest  possible  overall  cost)  Dynamic  (long  term  effects  –  

contribu%on  to  innova%on,  diversity,  cost  reduc%ons  over  %me)  

Equity   Distribu%onal  consequences    

Other  

Poli%cal,  ins%tu%onal,  legal  and  social  feasibility  

System  impacts  (security)  Market  impacts  

Local  impacts  (eg  GHG  reduc%ons,  employments  etc)  

…  A  policy  view  –  developers  will  have  different  priori%es    The  criteria  are  oNen  interlinked    The  rela%ve  weight  given  to  the  criteria  will  vary  according  to  poli%cal,  social  and  economic  condi%ons    One  size  doesn’t  fit  all  –  the  devil  is  in  the  detail:  there  can  be  good  and  bad  auc%ons  Design  ma*ers!  

What  should  RE  support  deliver?  

Generic support mechanism elements

• Capacity,  genera%on  or  budget  

Targets  

• Consumer  or  public  budget  

Payment  

Exis%ng,  retrofiVed  or  new  plant  

• Capacity  or  output  

What’s  supported?  

• Driver  for  cost  reduc%ons  through  learning  effects  

Constant  or  decreasing  support  over  %me  

Poli%cal  decisions  common  to  all/most  RES  mechanisms  

General  rule  seZng  

Pre-­‐auc%on  

Auc%on  format  

Post  auc%on  

• Should  the  auc%on  provide  similar/iden%cal  support  for  all  technologies  (T  neutral),  or  should  groups  of  technologies  or  specific  technologies  be  treated  differently?  

Technology  

• Predictability  increases  investor  confidence  and  can  contribute  to  the  development  of  robust  supply  chains  but  need  to  be  ins%tu%onally  prac%cal  

Frequency  of  rounds  

• Measures  to  increase  technological,  capacity,  actor  or  geographic  diversity.    Differen%a%ng  may  increase  short  term  costs  but  encourage  longer  term  efficiency  or  increase  social  acceptability  

Diversity  

Efficiency  

Efficiency  

Effec%veness  

Efficiency  

•  Set  dura%on  to  ensure  a  level  of  profit,  or  provide  support  for  the  dura%on  of  the  project.    Needs  to  ensure  sufficient  but  not  excessive  returns  

Contract  dura%on  

•  SeZng  minimum  bid  numbers,  bidder  numbers,  limi%ng  the  number  of  auc%ons  in  which  a  bidder  can  par%cipate  to  mi%gate  market  power.    Can  result  in  exclusions,  possibly  including  the  most  cost  effec%ve  projects  

Market  concentra%on  

•  Speed  at  which  support  might  be  reduced  as  a  driver  for  project  cost  reduc%ons.    Too  fast  risks  increasing  investor  risks  (and  therefore  prices),  too  slow  risks  over-­‐rewarding  developers  

Market  integra%on  

General  rule  seZng  

Pre-­‐auc%on  

Auc%on  format  

Post  auc%on  

Efficiency  

Efficiency  

Efficiency  

Effec%veness  

General  rule  seZng  

Pre-­‐auc%on  

Auc%on  format  

Post  auc%on  

• Capacity  or  genera%on  targets,  budget  targets.  Useful  for  delivering  policy  commitments,  but  can  also  act  as  an  ar%ficial  constraint  (ie  the  target  becomes  an  upper  limit)  

Volume  and  budget  control  

•  Eg  proven  technology,  land  ownership,  grid  and  planning  consents.    Encourages  realis%c  projects  and  bidding,  but  high  transac%on  costs  and  sunk  costs  may  discourage  [small]  bidders  

Prequalifica%on  requirements  on  the  project  

•  Eg  deposits  or  guarantees,  proof  of  financial  capability,  proven  experience.    See  above  for  pros  and  cons  

Prequalifica%on  requirements  on  the  bidder  

Effec%veness  

Effec%veness  

Efficiency  

General  rule  seZng  

Pre-­‐auc%on  

Auc%on  format  

Post  auc%on  

•  Sealed  bids  are  simple  with  low  transac%on  costs  but  do  not  allow  bidders  to  work  out  the  value  of  their  product  and  can  lead  to  winner’s  curse.    Descending  clock  is  a  mul%-­‐round  process  star%ng  with  a  high  target  price  and  falling  un%l  the  number  of  bids  matches  the  quan%ty  to  be  procured.    It  allows  bidders  to  adjust  their  bids  but  in  cases  of  weak  compe%%on  can  lead  to  coopera%on  between  bidders.    Hybrid  auc%ons  are  descending  clock  auc%on  followed  by  a  pay  as  bid  phase  

Sealed  bid,  descending  clock  or  hybrid  

•  Sealed  bid  variants.    Pay  as  bid:  the  strike  price  sets  the  amount  of  genera%on  eligible  for  support.    Bidders  receive  their  bid  price.  Uniform:  Winners  receive  the  strike  price  set  by  the  last  bid  to  meet  the  quota  (or  first  bid  that  does  not)  

(Uniform  or  pay  as  bid)  

Bids  

Efficiency  

General  rule  seZng  

Pre-­‐auc%on  

Auc%on  format  

Post  auc%on  

• Ceiling  prices  to  limit  overall  costs  of  the  mechanism;  minimum  prices  to  prevent  bids  which  are  unrealis%cally  low.    Both  need  to  be  realis%c  or  they  risk  limi%ng  viable  projects  or  over-­‐rewarding  developers  

Maximum  (ceiling)  and  minimum  prices  

• Mul%  criteria  auc%ons  (tenders)  involve  other  criteria  in  addi%on  to  price  –  eg  local  content,  environmental  impacts  etc  –  but  least  cost  bids  might  not  be  selected,  and  needs  clarity  about  selec%on  criteria.    Price  only  means  that  price  is  the  only  criterion  for  the  award  of  a  contract  

Price  only  or  mul%-­‐criteria  

Effec%veness  

Other  

Equity  

Prices  

General  rule  seZng  

Pre-­‐auc%on  

Auc%on  format  

Post  auc%on  

•  Financial  milestones,  construc%on  and  commissioning  %metables.    Allow  monitoring  of  project  management  and  some  certainty  on  delivery  %mescales.    Need  to  be  realis%c  and  may  have  to  be  tailored  to  individual  projects  to  reflect  real-­‐world  differences  between  technologies  

Delivery  deadlines  

•  For  delays  or  failure.    Can  be  financial  or  administra%ve  (exclusion  from  future  auc%ons).    Criteria  for  failure  must  be  clear,  and  the  penalty  must  be  enforceable  

Penal%es  

•  Awards  can  be  traded  on  secondary  markets  –  ie  they  can  be  transferable.    May  reduce  realisa%on  risk  by  spreading  it,  but  can  lead  to  specula%on  or  other  strategic  behaviour  and  increased  complexity.  

Secondary  markets  

Effec%veness  

Effec%veness  

Effec%veness  Other  

Other issues

•  Aim  to  enhance  na%onal  economic  development  by  using  na%onal  goods  or  services  [NB  could  breach  EU  state  aid/WTO  rules  

Local  content  rules  

Other  

Potential for conflicts

•  Beware of unintended consequences eg:

•  Strong prequalification criteria might discourage small bidders/new entrants reducing bidder diversity, possibly increasing concentration/reducing competition

•  Unrealistic ceiling prices can limit the number/ capacity of bids and therefore the effectiveness of the mechanism

•  It’s not an either/or situation … more about finding a balance that works

When auctions might not work

•  Auctions might not always be the appropriate policy option:

•  Market too small •  Market too concentrated •  Immature technologies – inappropriate to

expose them to too much competition •  So an auction will not deliver effective or

efficient outcomes

•  In such cases, other mechanisms would be more appropriate

•  Feed in tariffs for developing technologies

What makes ‘best practice’?

•  The right balance between effectiveness and efficiency (and other areas if appropriate)

•  This requires a clear policy vision about what is required – technology mix, price, quantity etc

•  The elements should then be chosen to fit

•  Most policy choices aren’t black and white … there are lots of shades of grey

More information/references •  Del Rio, P et al (2015) Overview of design elements for RES-E auctions,

Report D2.2 (a), AURES WP2: 2.1, http://auresproject.eu/files/media/documents/design_elements_october2015.pdf

•  Del Rio, P et al (2015), Assessment criteria for RES-E Auction, Report D2.2 (b), AURES WP2: 2.2 http://auresproject.eu/files/media/documents/assesment_criteria_october2015.pdf

•  IRENA/UKERC (2014), Evaluating renewable energy policy: a review of criteria and indicators for assessment, IRENA UKERC Policy Paper, http://www.irena.org/DocumentDownloads/Publications/Evaluating_RE_Policy.pdf

•  IRENA (2015), Renewable energy auctions: a guide to design, http://www.irena.org/menu/index.aspx?mnu=Subcat&PriMenuID=36&CatID=141&SubcatID=603

Strengths and weaknesses of auctions

•  Flexibility of different design elements

•  Price discovery through competition

•  Certainty for investors and policy makers about prices and quantities

•  Legal certainty between parties

•  Transparency of process, to avoid market manipulation

•  High transaction costs for bidders •  High transaction costs for the

auctioneer •  Risk of underbidding and the

‘winner’s curse’