Just like administratively set support, auction-allocated support can be paid in different forms, the most relevant of which are:
a) feed-in tariff (FITJust like administratively set support, auction-allocated su... More)
b) fixed feed-in premium (fixed FIP)
c) sliding feed-in premium (sliding FIP) – also known as Contract for Difference (CfD)
d) investment grantJust like administratively set support, auction-allocated su... More
The type of support affects the behaviour of RES developers, both in the planning and operation phase of the plant as well as during the bidding process in the auctionAn auction is a market mechanism with the aims of allocating....
Feed-in tariff (FITJust like administratively set support, auction-allocated su... More)
FITs pay a fixed amount per kWh to the RES plant operator. As the plant operator does not sell the produced electricity on the market, the FITJust like administratively set support, auction-allocated su... More is the only income stream for the RES plant. FITs pose a minimum risk to the project developer, as the future income stream of the installation is guaranteed, independent of electricity market developments. However, the lack of exposure to market signals also leads to distortions, as, for instance, generators have no incentive to stop producing in times of negative prices. FITJust like administratively set support, auction-allocated su... More are discouraged by current EU state aid regulation for all but very small installations or immature technologies. For most auctionAn auction is a market mechanism with the aims of allocating... schemes in EU Member States, FITJust like administratively set support, auction-allocated su... More will thus not be a suitable remuneration award metric.
Fixed feed-in premium (fixed FIP)
Under a fixed FIP scheme, the RES plant operator receives a fixed support payment on top of the remuneration obtained from selling the produced electricity on the market. If the fixed FIP is allocated through an auctionAn auction is a market mechanism with the aims of allocating..., bidders will formulate their bid in terms of monetary units of premium payment received per unit produced (€c/kWh).
An awarded project’s income thus fluctuates with the electricity market price, causing it to bear the full risk of future electricity price developments, as its total remuneration will be too low in case of decreasing future electricity prices and vice versa. The project developer is likely to add the respective risk premiums to his financing costs, thus raising his required support level. The regulator also bears a price development risk, namely if electricity prices increase in the long run and projects are eventually overcompensated. Nevertheless, the government spendings on a fixed FIP are more predictable compared to a sliding FIP, thus often making it more politically acceptable from a budget planning perspective.
An additional problem arises specifically when fixed FIPs are allocated through an auctionAn auction is a market mechanism with the aims of allocating...: Bidders calculate their bid price on the basis of their valuation of future price developments. Those bidders with the most optimistic expectations will therefore enter the lowest bids and win the auctionAn auction is a market mechanism with the aims of allocating.... However, as they are likely to have overestimated future prices, this leads to a higher risk of their project being unprofitable (a problem known as Winner’s Curse). Once in operation, installations under a fixed FIP scheme display a rather high degree of market integration. In case of negative prices, operators will continue producing until electricity prices become lower than the negative value of the fixed premium.
Sliding feed-in premium (sliding FIP) – also known as Contract for Difference (CfD)
Under a sliding FIP scheme, the support paid to an awarded project will consist of the difference between the winning price and a reference electricity price. The reference electricity price is usually defined as the average electricity market value of plants in the same technology category over a given period. If averaging periods are very short (i.e. one hour), a sliding FIP behaves like a FITJust like administratively set support, auction-allocated su... More with regard to the risk profile faced by the producer. If averaging periods are longer (i.e. one or several months), project operators face a higher exposure to market risks. We recommend that averaging periods be sufficiently long, i.e. at least 1-3 months .
If the sliding FIP is allocated through an auctionAn auction is a market mechanism with the aims of allocating..., projects bid on a total remuneration level (€c/kWh), and the support level is determined ex-post depending on reference electricity prices.
A Contract for Difference (CfD), such as for instance applied in the UK, is a special case of sliding FIP in which the winning price also constitutes a remuneration ceiling. RES installations are required to pay back their income to the regulator for times in which the reference electricity price was higher than their bid price.
A sliding FIP provides significantly more security about future income streams to the plant operator than a fixed FIP. The risk of Winner’s Curse is lower than under other award types, as bidders do not have to incorporate as many insecure elements into the calculation of their bid prices. At the same time, once the plant is in operation, the operator still has an incentive to produce at times when electricity prices are high, assuming sufficiently long averaging times for reference electricity prices. Producers will only know the exact amount of the premium ex-post, when the average market value over the defined time frame is known. At times of negative prices, producers react in a similar fashion as under a fixed FIP, continuing their production until the price becomes lower than the negative value of the expected premium. The regulator bears some risk in case electricity prices decrease, as support levels fluctuate with changes in electricity market prices. At the same time, the regulator does not risk having to pay for overcompensation such as under a fixed FIP.
Investment grantJust like administratively set support, auction-allocated su... More
Investment grants incentivise the installation of production capacities. Generation is then solely remunerated on the electricity market, thus exposing the generator to the full market price signal. If an investment grantJust like administratively set support, auction-allocated su... More is allocated through an auctionAn auction is a market mechanism with the aims of allocating..., bid prices are formulated in terms of total amount of the grant (€) if the size of the project is fixed, or in terms of monetary units per installed capacity (€/kW).
Investment grants expose the project developer to the full risk of future electricity market price developments. Similarly to a fixed FIP, the project developer has to incorporate this insecure component into his calculation for formulating his bid, thus leading to an increased risk of Winner’s CurseOccurs when a winning bidder unintentionally underestimates ....
In addition, project developers have an incentive to configure RES plants with high capacities. In some cases, this can be undesirable from a system perspective: For instance, a wind power project developer will be incentivised to plan installations with high generator capacity. However, high generator-rotor-ratios result in plants which display high production in strong wind, but fewer annual full-load-hours. From a system perspective, this leads to undesired production peaks. Installations with smaller generators in combination with the same rotor length have a more favourable production profile but are not attractive to the plant developer under capacity-based support. Similar issues arise for other technologies where plant design can influence full-load-hours, such as PV with solar tracking. Furthermore, for non-variable RES such as biomass, the hourly market price can be insufficient as an incentive to produce given their fuel costs, and a strike price would need to be set at which the operator is obliged to start producing.
Next to the remuneration type, two main design elements for support payments are the duration of the awarded contract and the possibility of updating the remuneration over time.
The length of the contracting period should take into account the time over which the plant can recover its costs and receive a reasonable profitability level. The duration of the contract is likely to be different for different technologies. In the past in both the EU (past and present schemes) and non-EU countries, the length of the period has clearly been concentrated in the 12-25 years range.
The rationale behind this design element is to adapt the remuneration level to the context conditions of the economy over time for example by linking it to the consumer price index, either fully or with a certain share.