Imperfect auctions damage investor confidence


November 23, 2015

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Going, going, gone. Governments in established markets such as Germany are looking to replace feed-in tariffs that are set centrally with feed-in tariffs determined by reverse auctions.

We can see the logic. Countries such as Germany have seen huge growth in wind and solar driven by the use of government-set feed-in tariffs, and renewables are now responsible for more than one-quarter of its energy mix. Now Germany’s leaders want wind and solar to be more competitive and responsive to market dynamics.

Meanwhile, in Poland, a new auction system is set to be introduced on 1 January 2016.

But we heard in a session at the EWEA conference in Paris last Wednesday that making a shift like this will affect investors in the wind sector. It is not simply that auctions push down the subsidies, which most investors that we talk to see as a necessary evil as the industry matures. Investors understand that auctions might make some projects unviable but also boost competition in the sector.

No, the big concern from investors is that governments do not know how best to design these auctions, and so will introduce systems that sow uncertainty in the wind sector and stifle growth.

In Germany, the introduction of these auctions for wind farms from 2017 is controversial. The system has been trialled this year in the German solar sector, but been criticised by those in the sector for favouring developers who can deliver low energy prices but not high-quality projects. Of course, the Holy Grail for any government is projects that can meet both of those criteria.

If a government tries to put an auction system in place then it could create a successful system like Brazil’s, which this month awarded wind and solar contracts for projects totalling 1.5GW, and is widely seen as a success. Or it could create a system like Italy’s that, according to ERG Renew managing director Massimo Derchi at the EWEA event, has done major damage to wind in the country.

In 2012, the Italian government launched auctions to slow annual wind installations from 1GW to around 400MW-500MW. However, the actual figure has come in at only around one-quarter of that lower target, with 108MW of wind installed in Italy in 2014.

Derchi says the main reason for the failure is that bidders do not always have the financial or technical expertise to actually build the projects they bid for: “If you don’t have that you will have players participating in the auction who try to get the incentive from the auction… as a way to try to sell the project,” he said.

If these developers cannot secure financial backing for the project then it will not be built, and the auction targets will not be met. He added: “That has been the main cause of failure in Italy.”

We are not questioning the fundamental logic of auctions, but they add uncertainty for investors by introducing variability to the levels of subsidies paid. Policymakers need to be aware, and address this, if they are to attract the investment to meet their wind targets.

Italy is now taking steps to fix its system. Poland and Germany will not want to follow its ignominious example.

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