Managing transitions to auction-based support schemes, and combining auctions with non-auction design elements.

This report is part of the AURES work package 6 and comprises the work carried out in the Task 6.3. It examines how hybrid auction schemes can combine auction and non-auction based mechanisms, and the transition pro-cesses from existing support policies to auction-based support schemes. Therefore, we analyse real-life exam-ples in the context of four country case studies. The report comprises two sections. The first section looks at the recent transition of the UK and the German offshore support schemes. The second part illustrates the com-bination of auction and non-auction elements under one support mechanism by providing an overview of the Californian and Mexican renewable energy support schemes.

The UK switched from a quota-obligation with tradable green certificates, the so-called “Renewables Obliga-tion”, to the auction-based contract-for-difference (CfD) mechanism, with the transition period lasting from mid-2014 until March 2017. In general, project developers could choose between the two schemes, but with solar PV and onshore wind power subject to an earlier phase-out than originally anticipated. Moreover, the UK offered early investment contracts, the so-called “Final Investment Decision enabling Renewables” (FIDeR), to ensure project development and mainly due to pressure from the industry. In Germany, policymakers introduced auc-tions instead of feed-in premiums as the main mechanism of renewable energy support for large-scale projects in 2016. Our focus in this report lies on the German support for offshore wind power. To ensure a smooth transition process to the new scheme, Germany enabled strict (and less attractive) transitional exemptions to certain projects, ran a transitional auctions for existing projects and furthermore, provided step-in rights during the enduring scheme for unsuccessful projects. While the German auction transition – with the first transitional auction resulting in an average price of 4.4 €/MWh – has been quite successful so far (should the projects indeed be realized in the future), the British transition process was mostly dominated by unexpected measures due to political changes in the country. This resulted in relatively high prices in the first CfD auction, investor uncertainty regarding the future of renewable energy support and unnecessary expenditure regarding the so-called FIDeR enabling contracts.

Our primary finding is that policymakers should announce a clear trajectory with fixed dates and auctioned volumes to raise certainty for investors and to help securing the local supply chain. Furthermore, although a high stakeholder involvement is desirable, it might lead to unnecessary measures designed to satisfy stake-holders (e.g. FIDeR). When designing the transition period, one should consider making the old scheme less attractive in order to prevent market actors from rushing into the old scheme and thus ensuring enough compe-tition in the new auctions. General uncertainty of phase-outs for certain technologies might increase this rush. Concerning possible compensation claims for already approved projects, introducing market-based solutions, as e.g. the transitional auctions in Germany, might lead to a favourable outcome.

The second part of our report examines the combination of auctions with non-auction design elements under a single support scheme. This can help policymakers make use of complementary advantages of more than one class of policy instrument. Therefore, we have analysed the hybrid scheme in California, as well as in Mexico. In 2002, California introduced the “Renewable Portfolio Standard”, one of the most ambitious quota obligations in the US. It obliges the three major investor-owned utilities in California to procure a certain amount of their sold electricity from renewable energy sources. The “Renewable Auction Mechanism” (RAM) is one mechanism to procure the renewable electricity from large-scale projects. Furthermore, the first round of the RAM set the initial tariff for California’s renewable energy feed-in tariff (ReMAT). Mexico liberalised its electricity market in 2013 and at the same time introduced renewable energy policies. In this context, the government implemented long-term (clean energy) auctions with three distinct products: generation, capacity and green certificates, where bidders can submit complex bids for as many (or as few) products as they wish. These auctions help attract investment in RES and ensure the fulfilment of the clean energy obligation.

Regarding hybrid auction mechanisms, we conclude that although linking auctions with feed-in tariffs/premiums can help identify the correct market prices, it might lead to distortions in the feed-in scheme, due to low prices in the auctions. Moreover, this connection may induce strategic bidding in the auction if there is little competition and multi-project bidders with high market power participate in both schemes. Another point we have identified, is that combining two mechanisms can help reduce the transaction costs of participation in market-based schemes, especially for smaller market actors. Whenever countries aim to transition towards an auction-based support scheme, introducing hybrid schemes can reduce costs and uncertainty, which would have occurred during a transition process towards the completely new support scheme. Another point is that several mecha-nisms under one scheme provide policymakers with the opportunity to gain experience and decide in the long-term for the most efficient scheme. Hybrid schemes provide to market actors the flexibility to choose the scheme which suits their needs best. Finally, as was seen in the case of introducing identical PPAs under the RAM in California, policymakers should not only focus on the auctions’ design, but also on the auctioned product.

Download the report here.