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Supporting renewables: FiTs not tenders?

14 Apr 2018 Dave Elliott

Feed-in tariffs have been very successful at supporting the expansion of renewables in the EU. But they are being replaced by competitive contract systems, there and elsewhere. Some very low price bids have certainly resulted, but not everyone is convinced that they will deliver as much capacity – there could be a destructive race to the bottom. That could slow the push to 100% renewables that some see is possible. Dave Elliott explains

Solar panels on a roof

More and more national governments are transitioning from guaranteed price feed-in tariff (FiT) models for supporting renewables to competitive contract tendering/contract auction schemes, justified in the belief that this will reduce costs. That’s the EU view, and tenders have also been backed by the International Renewable Energy Agency. However, the German Energy Watch Group says this is a mistake. FiTs have been very successful and widely adopted, whereas there are big disadvantages with tenders, their main effect being that less capacity is installed, with smaller projects being excluded and competition actually being reduced.

Energy Watch says that “tenders massively curb the expansion rates of renewable energies and thus unnecessarily jeopardize climate protection”. To the extent that they reduce the amount of capacity that’s installed, it’s that which reduces costs. For example, when tenders replace FiTs,investment volumes sink because a large number of decentralised, small investments are eliminated”. Worse still, Energy Watch says, tenders also reduce competition: “Tenders reduce the diversity of actors; private investors, energy cooperatives, and SMEs in particular are virtually barred from making offers given the high application requirements. [So] tenders help cement the market power of oligopolies by large corporations and established energy industry companies, thereby diminishing competition.” One result is: “Tenders decrease local public support for renewable energy development by excluding local communities from investment and project planning. [Moreover] in the tendering model, expansion volume and tender design are determined exclusively by the state, hindering free market forces from accelerating renewable energy growth and new innovations.” And for good measure, they add, “non-transparent procedures and government procurement practices encourage corruption” and “calls for tender do not promote advanced decentralized solutions, particularly for grid integration and sector coupling”.

Overall, Energy Watch says “tenders slow the cost reduction of renewable energy technologies: according to the learning curve, specific investment costs decrease only with further increases in market volume; since calls for tender are intended to cap the market volume and keep it lower than it would be with feed-in tariffs, they contribute to a considerable slowdown in the cost reduction of renewable energies.”

Some of this may seem hard to square with the fact that consumers had to pay for the FiTs, and it was the growing scale of that cost pass-through which led Germany and others to back off FiTs, in favour of auctions, and to slow their renewable energy programmes.  It is also the case that recent contract auctions around the world have led to some very low price bids for large wind and PV projects, in South America and Asia especially, with, for example, some PV projects getting contracts below $30/MWh in Chile and on shore-wind projects getting $40/MWh in India. However, that might have occurred anyway, given the rapid development of the technology and the expanding market for it, created by the FiTs globally.

The tendering/competitive auction approach also represents a “race to the bottom”, with a few low cost projects winning contracts, the rest being sidelined, and less capacity resulting overall. It is also not certain that the low bid price projects will actually all go ahead – they may have bid too low to be able to deliver in practice.  That is what happened in some cases back in the 1980s, with the UK NFFO price/capacity auction system – a number of contracted projects were not able to deliver.  Non compliance/default penalties are being introduced to limit this risk with the new auction schemes, e.g. for the UK CfD auctions. However, we have yet to see if that will work, especially since market conditions can change rapidly, making it hard for projects with tight profit margins to continue. For example, 25 wind and solar projects that won contracts under Brazils renewable energy capacity auction process have been abandoned, 557 MW in all, 250 MW of solar and 308MW of wind. The decision was taken “because a high number of projects which were contracted in Brazil’s first reserve energy auctions between 2014 and 2015 have remained idle or unbuilt”. That may be due to falling demand for power, as the Brazilian economy retrenched, but that’s just the sort of problem that inevitably faces competitive market-based support systems.  

The latest round of solar auctions in Mexico yielded an unheard-of average price of $20.57/MWh, including a $17.7 bid by Enel. But, as developers scramble to under-bid one another in the current market, some fear the price war may eventually erode the quality that is deliverable. Always assuming that the low bid projects can actually deliver at all.  Maybe they’re speculating against future cost falls? That can be risky.

Nevertheless, despite the potential problems with auctions and tendering, Energy Watch admits ‘For large investments with individual plants over 100 MW, tenders can be quite useful. They give the state the opportunity for targeted intervention – so that it may, for example, promote grid integration or attract large investors. At the large scale, SMEs, energy cooperatives and private individuals cannot raise adequate financial resources anyway.” That is clear. Indeed, some say that, in developing countries, it would be hard to run FiTs, even for smaller projects, since, unlike in the EU, there are not sufficient affluent grid-linked consumers to support and pay for the schemes. The upfront cost of domestic PV installation can be high and so can the subsequent cost passed through to consumers. Interestingly, that has led Uganda and Zambia to introduce so called GETFIT schemes, which combine grants and FiTs. See my new book with Terry Cook.

Energy Watch, however, clearly thinks FiTs can work in most places for small projects and, as technology costs fall, that may well be true. So they suggest “Up to a capacity of at least 40 MW, state support for renewable energies should continue to be based on or return to a basis in fixed, legally guaranteed feed-in tariffs. Should tenders under 40 MW also be desired, energy cooperatives should at least be exempted from the obligation to tender.”

Going on the offensive, they also claim “Given that the innovative power of feed-in tariffs is considerably higher than that of tenders, new tasks such as grid integration and sector coupling should be addressed with feed-in laws. A combined power plant remuneration, which has not yet been implemented anywhere in the world, seems particularly well suited. In this way, the goal of 100% renewable energies can be reached quickly and democratically. Furthermore, an approach without arbitrarily set expansion caps and proscriptive tender designs will promote stakeholder diversity and thus create space for additional sources of investment and innovation.”

The 100% renewables aim is further explored by Energy Watch in a joint report with Finland’s Lappeenranta University of Technology (LUT), which says that renewables can supply near 100% of global electricity by 2050, or even earlier, at less cost than a nuclear/fossil scenario. I mentioned the UK sub-scenario in an earlier post. For comparison, the ambitious global scenario by Mark Jacobson’s team at Stanford University also reaches 100% globally by 2050, with just wind, water and solar power, and despite avoiding biomass, its claimed that it can meet all energy needs, not just power, by then.

LUT and EWG say they will publish their full “all energy” scenario in 2018. But there is plenty enough in this one for now.

LUT’s earlier 100% renewables work has attracted some criticisms: it had a 2030 goal. 2050 seems more realistic. See the links back to the Energy Matters critique in this riposte from LUT.

Some of Jacobson’s work has also been challenged. Perhaps unwisely, Jacobson was at one point seeking legal redress on this. Evidently it had gone beyond scholarly exchanges. But he has now decided to abandon this suit. And perhaps more productively, he and his team, along with researchers from Aalborg University in Denmark, have produced a new study, which addresses some of the criticisms of the previous ones. See my next post.

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