International Auctions For Renewables PDF

International Auctions for Renewables
commissioned by the European Copper Institute
July 2016
Authors:
Simone Steinhilber
Mario Ragwitz
contributions by: Vasilios Anatolitis
Contact data:
Simone Steinhilber
Competence Centre Energy Policy and Energy Markets
Fraunhofer Institute for Systems and Innovation Research ISI
Breslauer Strae 48 | 76139 Karlsruhe
Phone +49 721 6809-281
mailto:simone.steinhilber@isi.fraunhofer.de
http://www.isi.fraunhofer.de
ii
Executive Summary ..................................................................................... iii
Introduction and Background ............................................................... 1
Designing international auctions .......................................................... 9
2.1
General benefits and challenges in international auctions ...... 9
2.2
Reciprocally opened auctions .............................................. 15
2.3
Commonly held auction ....................................................... 18
2.4
Assessment summary.......................................................... 22
Case study: Common auction between Portugal and Belgium ........ 24

3.1
Market characteristics and existing support scheme in

Portugal ............................................................................... 25
3.2

Belgium................................................................................ 26
3.3
Design of a potential common auction ................................. 27
3.4
Expected performance of a Portuguese-Belgian auction

scheme ................................................................................ 34
Policy Implications and General Recommendations ......................... 36
References ........................................................................................... 41
iii
Executive Summary
This report explores the options for international auction designs in the EU and provides recommendations on how the design of both national and international auctions should be considered
in the drafting of the new RES Directive.
Two basic options for international auctions are analysed:
Reciprocally opened auctions in which one Member State holds its own, nationally organised
auctions, and all or part of the target volume is opened for installations located in another
Member State. In return, the second Member State most likely opens all or part of its own
auction to installations in the first Member State.
Common auctions in which two or more Member States hold an auction together. All auction
design elements, including technology scope, target volume, regularity etc. are commonly
determined by both Member States. The common auction may be held in addition to national
auctions or replace them.
The two options display the following features:
Reciprocally opened auctions
Commonly held auctions
Required degree of coordination/ negotiation
High. Participating Member States need

to agree to open auctions reciprocally.
Design elements which affect the other
party, such as target volumes, must be
agreed upon.
Very High. Participating Member States

need to agree on all design elements of
the support mechanism and the auction
mechanism itself.
Effort sharing
Clear. Each Member State pays the support allocated in its national auctions.
Produced RES electricity counts towards
the auctioneering Member States RES
share. Additionally, potential sharing of
indirect costs and benefits may be
agreed upon.
To be negotiated. Participating Member

States can agree on a distribution of target volume, and expenditures will be
shared accordingly.
In case of sliding premiums, possibly additional complications due to differing
electricity market prices.
Scalability
Potentially complex. Mutual agreement

necessary between each pair of Member
States.
Good. Common auctions can be held by

clusters of Member States wishing to cooperate.
Complexity for
international
investors
High, especially as more Member States

open their auctions. Investors need to familiarise themselves with auction designs in each market in which they participate
Moderate. Less complex the more Member States participate in the same common auction, as investors only have to familiarise themselves with one auction
procedure.
Policy risks,
likelihood of
retroactive
changes
Slightly reduced as compared to national

auction schemes due to international
agreement, differs with the policy risks of
individual countries
Reduced due to international agreement. Especially in cluster constellations

combining low-risk and high-risk countries the financing risk will be averaged
and therefore countries with good potentials and higher risks will profit.
iv
A hypothetical application of a common auction for the case of Belgium and Portugal shows that
such a scheme has potential benefits for the involved countries, but can only be successful if
constraints outside the auction itself are addressed, for instance regarding interconnector capacities.
The study concludes with a number of recommendations of auction-related points which should
be considered in the currently drafted successor to RES Directive 2009/28/EC (RED II):
RED II may recommend sliding FIPs, but should let Member States decide on the type of
support they want to allocate via their auctions. Member States should be required to design auctioned support to incentivise RES producers to stop producing as soon as market
prices become lower than the negative value of support.
Member States should be free to implement technology-neutral, technology-clustered, or

technology-specific auctions.
Member States should be free to exempt actors from auctions if they belong to actor or
project size categories that are especially disadvantaged by auctions, or to immature technologies. Member States should be allowed to apply alternative support measures if an exante feasibility study finds that auction results will be poor in this specific market for a specific technology, regardless of installation size, type, or technology maturity.
Member States should be allowed to apply secondary objectives in their auction schemes,
provided that these are well-justified and that cost efficiency remains the main objective.
Auction rules should be flexibly adaptable by Member States. RED II should give guidance
on certain design elements such as ceiling prices and auction periodicity. It should require
Member States to include penalties and pre-qualifications in their auctions, but not prescribe a specific design.
RED II should not prescribe the time and degree of opening of auctions. However, it can
make the opening process easier for Member States by providing a description of options.
RED II should require Member States to take measures that enable stakeholders to participate in the design of auctions and have easy access to auctions.
Retroactive changes are detrimental to RES support schemes. This also applies to auctions.
RED II should include a clause forbidding Member States to implement such changes.
Introduction and Background
With very few exceptions, the latest General Block Exemption Regulation (GBER - Commission
Regulation (EU) No. 651/2014) which came into force in June 2014 requires Member States to
allocate support via a competitive and market-based mechanism by 2017 if their support measure is to be approved as justified state aid by DG Competition (European Commission). Effectively, this strongly encourages the implementation of auction-based feed-in premium
schemes1 to support renewable electricity (RES-E). As a result, many Member States are currently in the process of discussing or piloting auction designs to replace their existing support
schemes in the medium term (see auresproject.eu).
As with all RES support measures, the support allocated by an auction mechanism must hit the
right balance between exposing RES producers to market risks and thus promoting system integration on the one hand, and shielding them from unproductive risks which would endanger the
achievement of the 2030 RES target of at least 27% (European Council, 2014) on the other hand.
While support measures are increasingly being adapted to fit the requirements of electricity
markets as RES technologies mature, electricity market design also needs to change to accommodate new developments such as high RES shares and the possibility to integrate flexible demand (European Commission, 2015). In this report, we assess the risk levels of auction designs
and auction-allocated support measures for investors and auctioneers based on the assumption
that it is in the interest of policy makers to achieve the 2030 RES target.
With the enforcement of the GBER, a great step is taken towards convergence of national support schemes, which have historically been very diverse and determined nationally in EU Member States. The Commission now also explicitly encourages Member States to mutually open
their support measure to non-domestic installations, thus making them increasingly compatible
with the principles of the internal market.
The development of the internal market is a strategic objective of the European Commission,
and a harmonisation or mutual opening of national RES support schemes has been on the political agenda for several times in the past. Explicit calls for a harmonised RES-E support scheme
across all EU Member States were heard prominently in 2007/2008, before the introduction to
the current RES Directive 2009/28/EC (RED I). At the time, a harmonised technology-neutral
quota scheme with tradable green certificates was the most prominently discussed option
(Futterlieb and Mohns, 2009). However, this was met with strong opposition from some Member States who feared that a harmonised scheme would be neither effective nor efficient in
promoting the deployment of RES-E. The other prominent policy alternative under discussion
foresaw nationally designed, separate support schemes, coordinated based on EU guidelines.
The latter policy alternative was finally adopted in the RES Directive. In order to improve the
1 a variety of possible support instruments in combination with auctions will be discussed below.
cost efficiency of this regime using national RES targets, the RES Directive introduced three cooperation mechanisms statistical transfer, joint projects, and joint support schemes (Directive
2009/28/EC). They enable Member States with high-cost RES potentials to finance RES generation in a Member State with lower-cost potentials and therefore achieve their 2020 RES target
at lower cost than they could using their domestic resources alone. However, the actual use of
cooperation mechanisms by Member States has been very limited so far due to various reasons
(Klessmann et al., 2014).
With auction mechanisms now being gradually introduced in all Member States, internationally
opened auctions present an opportunity for increased cooperation. Even though auctions as a
support allocation mechanism are strongly favoured by state aid regulation, no harmonisation
takes place in the sense of a top-down, centrally steered support scheme such as was discussed
in 2007/2008. However, an increased opening of Member States auction schemes to non-domestic projects is a likely development. In the medium term, RES Directive II (RED II), for which
a proposal is currently being drafted by the European Commission, and which shall succeed Directive 2009/28/EC, presents an opportunity to anchor international auctions in EU legislation
in a more detailed manner.
Given this background, this report aims to explore the options for international auction designs in the EU, including their potential benefits and challenges, and to provide recommendations on how the design of both national and international auctions should be considered
in the drafting of the new RES Directive.
Auctions are a price-finding mechanism and thus present an alternative for a regulator to determining support levels administratively, for instance through LCOE estimates. In the RES-E context, auctions are combined with a support instrument such as feed-in tariffs (FIT), feed-in premiums (FIP), or investment grants. As mentioned above, for EU Member States a FIP or alternative instruments that facilitate market integration are clearly favoured by state aid regulation.
In contrast to schemes with administratively set support levels, auction-based schemes have a
higher potential to allocate support rights efficiently by awarding only the lowest-cost projects
in their respective category. They can thus increase the static efficiency of a support scheme and
decrease total support costs. Due to the auction volume being defined ex ante, they include an
inherent mechanism for support budget control, in contrast to instruments that apply administratively set support levels. Successful auctions furthermore achieve a high realisation rate,
meaning that those projects which are awarded do actually get built within the realisation deadline. However, the success of an auction strongly depends on its design.
Instruments
price-based
FIT
quantity-based
FIP
Investment
grant
Price level setting

mechanism
Quota
administrative
Price setting mechanism: Auction
auction-based
Technology-specific vs.
neutral
Price only/multi-criteria
Duration of support
design elements
Level 2
Etc
Sealed bid/descending clock/hybrid

Pay-as-bid/uniform price
Penalties
Pre-qualification requirements
Regularity of auctions
Site selection
Price ceilings
Figure 1: Levels of design elements. Source: del Ro et al., 2015, p.9
As shown in Figure 1, the design elements of an auction scheme are determined on two levels
(del Ro et al., 2015): Firstly, the kind of support that is being allocated by the auction is specified,
amongst others, by the following design elements:
Technology-specific vs. technology-neutral

Location-specific vs. location-neutral
Size-specific vs. size-neutral

Duration of support
Type of support: investment grant, FIT, sliding FIP, fixed FIP, etc.
Constant or decreasing support level throughout support period.
Secondly, the auction mechanism itself is defined by additional design elements (Haufe and
Ehrhart, 2016), including:
Target volume defined as installed capacity vs. generated electricity vs. budget
Criteria: Price-only versus multiple criteria
Dynamic versus static auctions (sealed bid, descending clock, etc.)
Pricing rule, e.g. uniform price versus discriminatory price rule
Single-item versus multiple-item auction
Pre-qualification requirements
Penalties
Regularity of auctions, i.e. one-off or recurring minimum and/or maximum price
There is no one-size-fits-all solution. Auction designs depend on the policy makers objectives
and have to be adapted to the specific conditions that apply to the technology and Member
State in question. Careful design is crucial to the success of any auction. However, a number of
design elements are especially challenging with regard to international auctions. The basic functioning and effects of these design elements shall therefore be illustrated here, while their implications on international auction design are then shown in chapter 2:
Technology-specific versus technology-neutral support

Support measures can either let a number of RES technologies compete freely against each
other, leading to only the lowest-cost options being deployed; or they can provide differing
levels of support to different technologies, thus leading to the deployment of higher-cost
technologies as well, which can drive down their costs in the long term. It has been shown
that technology-neutral schemes lead to lower generation costs in the short term. On the
other hand, this does not necessarily translate into lower support expenditures as technologyneutral schemes often come with high producer rents for the lower-cost installations. In addition, technology-specific schemes provide a better incentive for technology learning in the
long term, as immature technologies are supported as well (Steinhilber et al., 2014). Furthermore technology-neutral support might not lead to a minimisation of total system costs under
a static perspective, if some costs are not reflected in the generation cost (e.g. system
integration cost).
In the case of auctions, technology-neutrality can be achieved by letting projects from all desired RES technologies compete against each other. However, RES technologies have different
characteristics, for instance regarding project development times, typical sizes, and risk profiles. A multi-technology auction has more difficulty accommodating these characteristics by
tailored design features such as pre-qualification requirements, penalties, or degree of regulatory involvement in planning procedures. Uniform design features for several technologies
may unintentionally end up favouring one technology over others solely because their risk
profile corresponds well to the auction design, not because this is the most efficient outcome
in terms of costs.
An auction-based scheme can be made technology-specific in several ways, for instance by
holding separate auctions for each technology, by defining separate technology contingents
with different ceiling prices in one auction, or by giving favoured technologies a bonus in a
multi-criteria auction.
Location-specific versus location-neutral support
Policy makers may want to steer the geographic distribution of RES installations, for instance
in order to avoid grid constraints or problems with public acceptance in areas where RES installations reach high densities. Design options to influence the geographical distribution of
awarded projects in an auction scheme include the introduction of a pre-qualification criterion which prevents all projects outside of the desired region(s) from participating in the auction; contingents with different ceiling prices for different regions or location types; a multicriteria auction in which projects from desired regions or location types score higher; or the
use of a reference yield model, although this only has an indirect effect on location and mainly
aims at reducing producer rents (see Agora Energiewende, 2014). Favouring certain locations
represents a trade-off to the policy maker as it will steer RES deployment away from leastcost sites and will therefore decrease the auction schemes cost efficiency.
Type of Support Payments

Auctions can be used to allocate several types of support payments: FITs, FIPs, or investment
grants, all of which have benefits and drawbacks.
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. However, this also exposes the project developer to the full risk of future electricity market price developments. Furthermore, for non-variable RES such as biomass, the
hourly market price can be insufficient as an incentive to produce, and a strike price would
need to be set at which the operator is obliged to start producing. For variable RES, investment grants have resulted in insufficient plant maintenance and undesired plant configuration2 .
2 For instance, a wind power project developer will be incentivised to plan installations with high genera-
tor 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.
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. Auction-allocated FIT are not covered
under the current GBER and will therefore not be discussed further in this study.
FIPs are the most prominent remuneration type in newly designed auction schemes in EU
Member States at the moment, as they are both an accepted remuneration type under GBER
and can be designed so as to expose producers to market price signals and risks to differing
degrees. Two basic types of FIP are frequently discussed, both of which can be combined with
an auction mechanism: sliding (also known as Contract for Difference) and fixed. In a fixed FIP
scheme, projects bid on a fixed premium on each kWh sold on the electricity market. An
awarded projects income thus fluctuates with the electricity market price, causing it to bear
the full risk of future electricity price developments, as their total remuneration will be too
low in case the 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. Electricity consumers, being the party who finances RES support, also bear a price
development risk, namely if electricity prices increase in the long run. In addition, another
problem arises specifically when fixed FIPs are allocated through an auction: 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 auction.
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 Winners 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. In contrast, under a sliding FIP scheme,
projects bid on a total remuneration level (c/kWh). The support paid to the awarded project
will consist of the difference of the winning price and the average electricity market value of
plants in the same technology category. Averaging periods should be sufficiently long, i.e. at
least 1-3 months3. A sliding FIP thus provides significantly more security about future income
streams to the plant operator. The risk of Winners Curse is lower, as electricity price expectations do not have such a significant influence on how bidders calculate their bid prices. At
3 The length of the averaging period significantly influences the degree of market integration of RES plants.
With very short periods (such as one hour), a sliding FIP behaves similarly to a FIT. The plant operator
always receives the guaranteed total remuneration. Under longer averaging periods, the premium
payment is calculated based on the average market value of the given RES technology in the last x
months. The reference value is thus not the same as the electricity price for which the RES operator
is actually selling his electricity. Plant operators are incentivised to sell as much as possible at times
when electricity prices are higher than the average market value for their technology.
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 market values. 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. Electricity
consumers bear some risk in case electricity prices decrease, as support levels fluctuate with
changes in electricity market prices. At the same time, consumers do not risk having to pay
for overcompensation such as under a fixed FIP. A compromise solution in terms of risk distribution is a fixed FIP with cap and floor prices (Klobasa et al., 2013). In addition, a variable FIP
expressed as a percentage of the market price is thinkable. This option delivers an exaggerated market signal to RES producers, thus giving them a greater incentive to adjust their production accordingly. However, this option also greatly increases market price risks to producers and is therefore not recommended.
For both main premium design options, sliding and fixed, there is an intense discussion on the
continuation of premium payments during periods of negative prices. The EU Commission
demands within its environment and energy state aid guidelines that a support regime should
not give any incentives for the production of electricity from RE in the case of negative prices
on the electricity market. The reason for this requirement is that negative prices which are
caused by renewable energy support schemes are considered inefficient. However, as has
been shown by Hfling at al. (2015) continued support during periods of negative prices can
lead to cost efficient RES target achievement if negative prices are higher than the negative
green-value of RES-E. Furthermore, moderately negative prices can lead to dynamic efficiency
of the power market as they are an important incentive for flexibility options leading to a
reduction of must-run capacities, demand side management and investments in storage.
Sliding FIP
Cap-and-Floor
FIP
Fixed FIP
FIP as
percentage
Total revenue (hourly)
Total revenue (monthly average)

Market price
Support level
Figure 2 Support levels and revenues under different FIP types. Source: Adapted from Klobasa et al.,
2013
For the above-mentioned reasons, a sliding FIP with a sufficiently long averaging period is
recommended for national auction-based FIP schemes, as both fixed and sliding FIPs incentivise market-compatible dispatch behaviour, but the sliding FIP comes with lower overall risks.
Keeping these considerations in mind, we shall now turn to the specific challenges of designing
cross-border auctions.
Designing international auctions
The benefits and challenges of international auctions are more or less pronounced depending
on the design features of the auction scheme. International auctions can take two basic forms:
The first possibility is for a Member State to hold a national auction and open all or a maximum part of the
auction volume to installations from other Member
States. For reasons of political acceptability, this Member State will usually demand reciprocity, meaning that
A note on target achievement

The main motivation for cooperation
in the form of international auctions is
only installations from those Member States can apply
to lower the costs of target achieve-
which in turn have opened their national auctions to

foreign installations. The second possibility are commonly held auctions, meaning that two or more Mem-
ment. In the time frame until 2020,
ber States will hold an auction which is open to installa-
Directive 2009/28/EC. For the post-
tions from the participating countries. These common

auctions can be held instead of or in addition to national, closed auctions.
2020 period, we use the term target
This chapter will first present benefits and challenges

shared by both these international auction types. Secondly, specific issues concerning each of the two types
are discussed. The chapter concludes with a table summarising the main benefits and challenges of each auction type.
2.1
this means the achievement of the

binding national targets as defined in
to refer to a Member States planned

RES deployment trajectory, determined by the Member State itself, be
it through a pledging mechanism under an EU governance framework,
purely nationally, or otherwise.
General benefits and challenges in international auctions
The potential benefits of international auctions are similar to the arguments previously brought
forward in favour of a harmonised RES-E support scheme and for introducing the cooperation
mechanisms into the existing RES Directive: As natural resource potentials differ widely across
the EU, a policy regime which encourages exploitation of the least-cost sites would lead to higher
static efficiency in the sense of reduced generation costs (Resch et al., 2014). International auctions would potentially allocate support to those projects located at the most resourceful sites.
In addition, a support mechanism based on an international agreement may be less prone to
retroactive changes. These have been undertaken previously in many national support schemes
and led to severe investor uncertainty (Keep-on-track, 2013). Furthermore, the compatibility of
nationally isolated RES support schemes with the EU internal market is deemed questionable by
many (see for instance Bot, 2014), and a gradual opening can represent a political compromise
between those actors pushing for a fully market compatible regime and those aiming to protect
10
well-functioning national schemes. As the new state aid regulation has prompted a large number
of Member States to revise their support measures and to introduce auctions, this provides a
policy window in which international auctions can be considered more easily.
However, the design of successful international auctions does not come without challenges.
Generally, as with previous policy measures that aimed to maximise the use of best sites to drive
down overall generation costs, possible problems can include:
In Member States with abundant low-cost RES potentials, installations may reach very
high densities (hot spots), thus requiring grid expansions and reinforcements. High
concentrations of RES also affect the profitability of other energy producers in the same
market zone.
Social and political acceptability: In Member States without low-cost RES potentials, the
public may not approve of having to finance support for RES installations located in another country, as positive effects on labour markets or domestic industry are then perceived as benefiting the population of that country. A forceful opening of auction
schemes may thus put functioning and accepted national schemes at risk. In Member
States with abundant low-cost RES potentials on the other hand, hot spot creation can
lead residents to oppose either the installations themselves or the necessary grid expansions, thus risking social acceptability of RES in general.
At least in the short term, international auctions are expected to exist alongside purely
national support. In order not to undermine national support measures, they must
therefore be coordinated carefully. In the case of auctions, such considerations are especially important when setting target volumes, as the overall target volumes from national and international auctions combined need to be restrictive enough to still create
competition in the market(s) covered by both measures.
Additional challenges in auction design stem from differing framework conditions across Member States:
RES installations must obtain building and environmental permits as well as documentation to verify that grid access is ensured. The length and complexity of such permitting
procedures vary greatly across Member States. This influences generation costs of RES
projects. Permits are also often used as a material pre-qualification in auctions to ensure
that participating bidders both have a sincere intention of realising the project and that
the project has reached a stage of development which makes it likely that it will be
brought to completion at a predictable cost. However, if permits are not equivalent
across countries, this makes RES projects more difficult to compare for the auctioneer.
Access to finance: Costs of capital and typical debt-equity-ratios for RES projects differ
between countries. While large investors can be expected to have access to finance
11
albeit at differing conditions depending on the location of their planned project

smaller actors are more dependent on local sources of finance. Conditions for getting
credit may thus differ considerably between countries, especially for smaller investors.
Electricity market prices: As long as European electricity markets are not fully coupled,
wholesale market prices differ across Member States, both in their short term fluctuations as well as longer-term averages. Price development is influenced by a multitude of
factors, not least the share of electricity being generated by variable renewable sources
in a specific price zone (European Commission DG Energy, 2014).
These challenges and differing framework conditions require the designers of both types of international auctions to make decisions about the following design elements:
Setting the target volume

As we will see in the following sections, target volumes must always be set considering parallel
national support schemes.
Support expenditures, support type, and the reference electricity price
As mentioned in chapter 1, it is recommended for national auctions that support to winning
bidders is paid in the form of a sliding premium in national auctions. This type of premium,
however, becomes more complex in an international auction. The amount of premium received by the plant operator is influenced by the average market value, meaning the electricity market price at which plants in the same technology category (e.g. wind) were able to sell
during a defined period (e.g. the last 3 months). Market values will likely differ between Member States A and B, as long as markets are not fully coupled and interconnector capacity remains a bottleneck
12
Assumptions:
2 Member States
Total volume of auction: 100 MW, corresponds to 100 GWh/a (at 1000 FLH)
Country A: LCOE 100 /MWh
Country B: LCOE 80 /MWh
Reference electricity price: Country in which installation is located
LCOE (/MWh)
Market value (/MWh)
Support payment (/MWh)
Case 1:
Case 2:
40
40
30
50
60
100
Country A
80
50
Country B
Volume in country A: 0 MW support expenditures 0

Volume in country B: 100 MW support expenditures 3.0 mn
60
100
Country A
80
30
Country B

Figure 3 Influence of electricity market prices on support expenditures
Figure 3 provides a numerical example of two Member States with different LCOE who conduct an international auction with a target volume of 100 MW. Due to the lower LCOE in
Member State B, the whole volume is awarded to projects in that country. We assume that
the reference electricity price is that of the electricity market where the plants are situated.
Support expenditures are determined by the difference in the bid price (which for simplification we assume to be equal to LCOE in this example) and the market value on the local electricity market. Depending on the market value, support expenditures can differ significantly.
In case 2, support expenditures are even higher than they would have been, had all installations been built in country A, despite the higher LCOE there.
Instead of defining country Bs electricity price as the reference, the price of country A or an
average of both prices could be selected. Another alternative is to revert to fixed premiums
in the case of international auctions. The implications of these alternatives on effort sharing
between the two Member States depend on the concrete auction format and are thus discussed in more detail in sections 2.2 and 2.3.
Effort sharing and payment mechanism
The effort sharing arrangements between Member States is a matter of negotiation. Next to
the award prices expected to be realised in the auction, there may be other factors influencing
the negotiation. Burden sharing considerations are mostly relevant in the context of common
auctions, but may also play a small role in reciprocally opened auctions.
13
Firstly, the installation of RES has indirect costs and benefits. Apart from the generation costs,
the additional system costs of large amounts of RES have to be borne by the country in which
the installations are situated. In addition, benefits such as labour market effects, local investments, and reduced air pollution from replaced fossil fuel generation also remain in the producing country. Depending on how highly these effects are valuated, compensation could be
requested either by the country in which most RES are situated, or by other partners. Secondly, the willingness to pay for a kWh of RES-E may be different in the participating countries, depending on the political importance of achieving a certain RES share and on the opportunity cost of producing RES-E without an international auction.
Once the burden sharing is agreed upon, there are a number of options to then organise the
actual payment streams for support expenditures between the participating Member States.
Necessity of physical import of non-domestic RES-E
In the short term, there is no technical necessity for physical import of the electricity produced
by non-domestic RES installations. The produced electricity can count towards the paying
Member States RES target in the form of a statistical transfer. However, support payments
linked to a physical transfer may be easier to communicate politically.
In the long run, grid expansions must keep up with RES deployment, and this also applies to
cross-border interconnections. Therefore the physical and market impacts should be included
in the design of cross-border auctions. A conceptual approach to consider the impact of new
RES-E in one country on an electricity market in other countries could be as follows: A new
unit of RES-E capacity installed in a MS, causes changes in generation mixes of one or more
MS, depending on the status of the grid and the economic dispatch. It is a valid assumption
that the change in generation pattern a MS experiences from supporting RES installations in
other countries decreases with the electrical distance between the MS and the RES-E installation under consideration. The change in generation mixes induces a benefit and the power
from the RES-E capacity displaces some alternative source of generation, so that costs for fuel,
emissions and possibly capacity can be saved. One has to aggregate the cost savings this unit
causes over its lifetime in all MS in order to assess the full benefit of a new unit of RES-E
capacity.
Pre-qualification requirements - Comparability of licenses and permits
It is strongly recommended for the auctioneer to require material pre-qualifications from participating bidders. If licenses, grid access certificates and building permits are to be used as
material pre-qualifications, their comparability between countries needs to be verified and
14
pre-qualification requirements adapted accordingly. Where possible, policy makers should

aim for a convergence of permitting procedures and grid access guarantees in the long run.
Pre-qualification requirements - Site eligibility
Member States may restrict eligibility of RES-E projects for support for a variety of reasons by
applying regulatory measures outside of the auction design itself. Restrictions may for instance apply to land availability if projects are only allowed to be situated on certain site categories, as is the case in Germany where PV plants on conversion sites and side strips along
roads or railroad tracks are eligible for support. The use of agricultural land for this purpose,
although low in costs, is strictly limited for reasons of ecology and public acceptability (Klessmann et al., 2014).
If site eligibility is handled differently in the participating Member States, this influences the
LCOE of the projects competing against each other. A Member State which rules out certain
land types for ecological reasons must also consider whether it wants to finance RES installations on exactly this land type in another Member State where this is not forbidden.
Location-specific versus location-neutral support - Steering geographic distribution
The participating Member States may wish to steer the geographical distribution of RES projects, for instance to align RES deployment with existing and planned grid infrastructure. If
differences between LCOE are large, they may want to prevent all installations being built in
one Member State, as the resulting loss of social acceptability might outweigh the gains in
economic efficiency. Member States may thus consider contingents or boni for certain regions
in order to ensure a more even distribution of awarded projects.
Similar negotiations are necessary if the participating Member States wish to realise other
secondary objectives, such as for instance with regard to actor diversity, labour market effects, innovation and domestic industry effects.
Coordination of grid plans with RES deployment
International auctions make RES deployment trajectories more difficult to predict, as the capacity volumes necessary to achieve one Member States RES target are likely to be spread
across two or more Member States. The participating Member States thus need to coordinate
their respective grid planning with each other and with the outcomes of the international
auction.
All of the above design issues are subject to negotiation between cooperating Member States
and have different effects depending on whether they are applied in an opened national auction
15
or a common auction. These specific effects shall thus be illustrated in more detail in the next
two sections.
2.2
The concept:
Member State A holds its own, nationally organised auctions. All auction design elements,
including technology scope, target volume, regularity etc. are determined by that Member
State. All or part of the target volume is opened for installations located in Member State B.
In return, Member State B opens all or part of its own auction to installations in Member State
A, which, however, may differ with respect to technology scope and other design elements.
If Member State C decides to open its auctions, it will negotiate with Member State A and/or
B for accessible target volumes.
In this approach, each Member State largely determines the design of its own auction. In principle, one Member State could open its auction unilaterally to installations from one or all other
Member States. In practice, however, for reasons of political acceptability both within its own
constituency and with other Member States, it is more likely that a country will only open its
auction after a mutual agreement for reciprocal opening. By opening his auction to installations
from a second Member State, the auctioneer may significantly affect the RES market in that
Member State, and thus the outcome of any national auctions held there. Such indirect effects
as well as the conditions of reciprocity must therefore be negotiated between the Member
States. Other design elements have a small or no effect on the other Member State and can thus
be decided by the Member State holding the auction itself. The implications of the following
design elements are especially relevant in opened auctions:

If Member State A unilaterally opens all or part of its target volume to installations located in
Member State B, this will increase competition in the opened auction, especially if LCOE in
Member State B tend to be lower. It will also potentially decrease competition in any auction
Member State B may hold nationally. If the two Member States mutually open the same volume, this will affect competition levels in both Member States to differing degrees, depending
on how much LCOE differ between the two countries. The opened volumes are thus an important subject of negotiation between the participating countries. Market studies in each
16
participating Member State are necessary, taking into account the volumes available in each
market and the volumes already demanded by existing national auction schemes.

Figure 4 extends the example introduced in Figure 3, this time assuming that country A is
holding an auction, of which it has opened the whole volume for installations from country B.
As previously, all capacities are awarded to installations in country B due to their lower LCOE,
and support expenditures differ according to the market value of the electricity in country B,
as the reference electricity price is defined as the price in the country where the installation
is located. However, this time it is country A who counts the produced electricity towards its
RES target, who pays the full support expenditures, and who therefore bears the full risk of
decreasing market values in country B.
Assumptions:
2 Member States, country A opens auction to installations from country B
LCOE (/MWh)
Market value (/MWh)

Case 1:
Case 2:
40
40
30
50
60
100
Country A
80
50
Country B
60
100
Country A
80
30
Country B
National auction:
Volume in country A: 100 MW support expenditures 4.0 mn
National auction:
International auction:
Burden sharing:
decreased support expenditures for country A
increased deployment and local benefits for country B
Burden sharing :
no local benefits, increase in support expenditures for country A
Figure 4 Influence of electricity market prices on support expenditures in an opened auction
Country A may alternatively define the reference electricity price as its own electricity price,
or as an average between the electricity prices of countries A and B. If the market values in
country A are used as the reference, country A bears a similar risk, namely that of its own
electricity price decreasing and thus driving up support expenditures (although from the perspective of consumers, this would be compensated by lower electricity prices). At the same
17
time, RES project operators face a very high risk of receiving support payments which do not
correspond to the market values they are actually realising on their domestic market, thus
potentially making their project unprofitable. In an auction-based scheme, bidders will attempt to predict these domestic market prices to determine their bid level, thus leading to
the same risk of Winners Curse as mentioned previously for the fixed FIP. This design option
is therefore not recommended. The average electricity price of both countries, on the other
hand, is an option that spreads the risk more evenly between Member State A and the plant
operators. However, the main unproductive risk that remains on the side of the operator under such an average market price is the lack of interconnector capacity.
Fixed FIPs, due to the strong influence of future market prices on remuneration, carry the
biggest incentives to build RES plants in that country in which capacities are still needed. However, as mentioned above, future electricity prices are hard to predict since they are influenced not only by CO2 and fossil fuel prices but also by the development of demand. A fixed
FIP thus poses a higher risk to the bidder and is more likely to lead to Winners Curse. The
auctioneer must balance higher risk premiums for the investor as well as the risk of overcompensating the winning installations in case of higher market prices against the risk of high
support expenditures under a sliding premium if foreign market values decrease. Taking all
these risk factors into account, an average market price of countries A and B as reference
price combined with a sliding premium may be the best compromise between the risk for the
auctioneer and the investor.

The effort sharing arrangement in reciprocally opened auctions is comparatively clear, as each
Member State pays the support which was allocated in its own auction. Questions about compensation of indirect costs and benefits may still arise. Effects in each country should be similar if the countries open similar volumes to each other. However, if LCOEs in the participating
countries are very different, leading in mainly projects from one country being awarded, this
may lead to imbalances in indirect effects.
Regarding the organisation of payment streams, one possibility is that all plants receive support payments from the DSO/TSO they are connected to. At the end of each year, each country makes a compensation payment to its partner country to cover the support expenditures
for the plants that were awarded in its opened auction. Alternatively the payments by the
DSOs may be aggregated at TSO level and shared between the TSOs according to a predefined
rule, which considers in the auction volume of each country and the agreement on how to
share indirect costs and benefits.
18
Reciprocally opened auctions do not bring about a reduction of complexity for investors, as each
countrys auction follows its own design. Countries who want to newly open their auctions can
learn from existing best-practice examples of opened auctions, but will have to go through individual negotiations with each Member State they want to cooperate with.
2.3
Commonly held auction
The concept:
Member State A and B hold an auction together. All auction design elements, including technology scope, target volume, regularity etc. are commonly determined by both Member
States. The common auction may be held in addition to national auctions or replace them.
A greater number of Member States may decide to form a cluster to implement a common
auction, thus requiring them to negotiate all of the above points.
This approach requires a high degree of detailed negotiations, as every single design element in
a common auction is subject to agreement. However, once a common auction mechanism is set
up, additional Member States can join if they are willing to accept the existing auction design.
Design elements with far-reaching implications include:

Participating Member States must agree on a target volume for their common auction. Just
as in reciprocally opened auctions, the target volume of the common auction must take into
account volumes auctioned in other, purely national auctions. Total volumes must be significantly smaller than the volumes supplied by the market in order to ensure sufficient competition.
Figure 5 repeats the previous example for the case of a common auction with an agreed burden sharing of 80%/20%. Member States pay support to the installations in their country and
afterwards make compensation payments to each other to ensure that Member State A bears
80% of support expenditures and may count a corresponding share of the produced electricity
towards its RES target, and Member State B takes over the remaining 20%. Again, we assume
that the reference electricity price is that of the country in which the installations are located.
19
Assumptions:
2 Member States holding a common auction
Auction share country A: 80%
Auction share country B: 20%
Case 1:
LCOE (/MWh)
Market value (/MWh)
Case 2:
40
40
30
50
60
100
Country A
80
50
Country B
60
100
Country A
80
30
Country B
National auction:
National auction:
Burden sharing :
Support expenditures country A: 2.4 mn (80% * 3.0 mn )
Support expenditures country B: 0.6 mn (20% * 3.0 mn )
decreased support expenditures for country A
Burden sharing :
Support expenditures country A: 3.2 mn (80% * 5.0 mn )
Support expenditures country B: 1.8 mn (20% * 5.0 mn )
no local benefits from deployment, no increase in expenditures
increased support expenditures, increased deployment and local benefits for
country B
Figure 5 Influence of electricity market prices on support expenditures in a common auction
In the first case, both country A and B benefit from the common auction in comparison to
each conducting a national auction, either through decreased support expenditures or
through local benefits. However, there is a risk that the second case occurs, in which both
countries suffer either a decrease in local benefits or an increase in support cost burden.
Using the market price of country A as the reference value is not a meaningful alternative in
a common auction. However, Member States may agree to spread their risk by using an average of both countries market prices as the reference. As more countries join the cluster, the
reference market price would then be defined as the average of all their market prices.
Fixed premiums, as described above for reciprocally opened auctions, will increase the risk
for investors and also carry some risk for the auctioneer which has to be balanced against the
risks posed by sliding premiums.

The effort sharing arrangement in a common auction is less clear than in an opened auction.
Firstly, the participating countries must agree on who receives which share of the produced
20
electricity to count towards his national target. Secondly, the burden of support expenditures
must be allocated. The simplest option is to divide support expenditures by the same ratio as
the produced electricity. However, indirect costs and benefits can be an argument in favour
of a different cost distribution. Secondly, the negotiation is influenced by the countries willingness to pay. In case of the country with higher LCOE, its willingness to pay will be influenced by the support expenditures which would be caused by installing its own RES on its own
territory, which may be higher than the prices awarded in the common auction. This country
may thus be willing to pay more. The country with lower LCOE, on the other hand, may realise
the same support levels in a purely national auction, without sharing its lowest-cost potentials
with another country. It may thus have a lower willingness to pay.
Regarding the organisation of support payment streams, one possibility is that all plants receive support payments from the DSO/TSO they are connected to. At the end of each year,
support expenditures are tallied up and a compensation payment is made between the TSOs
of the two countries according to the effort sharing agreement. Alternatively, the two countries can create a common fund to which they contribute according to the effort sharing
agreement, and out of which support payments are then taken.
The auction can be scaled up into Member State clusters with relatively little additional complexity. Such a development is also beneficial to investors, as they only need to familiarise themselves with one auction design.
Clusters of Member States can in principle be created in a bottom-up or top-down process,
where the most efficient and effective auctions would be expected from clusters that fulfil the
following criteria:
Differences in natural resource endowment: A significant increase in cost efficiency is

possible if Member States abundant low-cost potentials team up with Member States
with fewer natural resources.
Wealth differences: Ideally, financially strong Member States will finance RES deployment in weaker Member States. This will likely go along with a decrease in policy risks
and thus lower risk premiums from investors.
Physical proximity: As RES shares rise across Member States, physical transfer between
partnering countries becomes more relevant and is easier if the partners are geographically (or more precisely: in terms of electrical connectivity) close.
Coupled markets: With electricity market prices having a great effect on support expenditures, cooperation within coupled markets poses fewer risks to Member States.
Coordinated grid development plans: Cooperation within a group of Member States
which coordinates grid development plans, including interconnectors, ensures better
grid utilisation and decreases curtailment.
21
It is not likely that a cluster will fulfil all of the above criteria. However, to cover at least part of
them, clusters could be modelled after existing regional groups as suggested by Gephart et al.
(2015):
the PLEF (Pentalateral Energy Forum) or Electricity Regional Initiatives for the field of
electricity markets
ENTSO-E regional groups or BEMIP (Baltic Energy Market Interconnection Plan) for
Member States with existing coordination regarding infrastructure planning and operation
NSCOGI (North Sea Countries Offshore Grid Initiative) for all of the above issues
We recommend letting Member States form clusters on a voluntary basis in a bottom-up process. Top-down clustering is unlikely to be politically feasible and will not lead to Member States
having ownership for their cluster.
22
2.4
Assessment summary
The following table summarises the characteristics of both auction types with regard to a range
of criteria which are expected to be relevant for policy makers when considering the introduction of international auctions.
Table 1: Characteristics of reciprocally opened auctions versus commonly held auctions
Commonly held auctions
Required degree of coor- High. Participating Member States Very High. Participating Member
dination/negotiation
need to agree to open auctions re- States need to agree on all design
ciprocally. Design elements which
elements of the support mecha-
affect the other party, such as tar-
nism and the auction mechanism
get volumes, must be agreed
itself.
upon.
Effort sharing
Relatively clear. Each Member
To be negotiated. Participating
State pays the support allocated in
Member States can agree on a dis-
its national auctions. Produced
tribution of target volume, and ex-
RES electricity counts towards the
penditures will be shared accord-
auctioneering Member States RES
ingly.
share. Additionally, potential sharing of indirect costs and benefits

may be agreed upon.
In case of sliding premiums, possibly additional complications due

to differing electricity market
prices.
Scalability
Potentially
complex.
Mutual
Good. Common auctions can be
agreement necessary between
held by clusters of Member States
each pair of Member States.
wishing to cooperate.
Complexity for interna- High, especially as more Member Moderate. Less complex the more
tional investors
States open their auctions. Inves- Member States participate in the
tors need to familiarise them-
same common auction, as inves-
selves with auction designs in each
tors only have to familiarise them-
market in which they participate
selves with one auction procedure.
23
Policy risks, likelihood of Slightly reduced as compared to Reduced due to international

retroactive changes
national auction schemes due to agreement. Especially in cluster
international agreement, differs
constellations combining low-risk
with the policy risks of individual
and high-risk countries the financ-
countries
ing risk will be averaged and therefore countries with good potentials and higher risks will profit.
24
Case study: Common auction between Portugal

and Belgium
This case study shall explore the possibility of a common auction between Belgium and Portugal.
The case is promising as Portugal has low-cost RES potentials especially in PV and has expressed
a clear interest in cooperation mechanisms in the past (DGEG, 2013). Belgium on the other hand,
has comparatively high potentials in offshore wind, but less abundant natural resources in lowcost technologies. It can therefore be economically attractive for Belgium to finance PV installations in Portugal rather than costly offshore wind parks on its own coast.
Figure 6 LCOE estimate for large-scale PV installations in Belgium and the Iberian Peninsula in
2020, based on 7% interest rate. Source: Own calculations.
The case study shall focus on a potential common auction for large-scale PV, as the Portuguese
potentials for this technology are abundant and low in cost, as indicated in Figure 6. We will first
introduce the market characteristics and support measures in place in both countries and then
move on to a possible common auction design.
This case study serves as a hypothetical example and does not reflect official Portuguese or Belgian positions.
25
3.1

Portugal
Portugal, with its roughly 10.5 million inhabitants, displays the following key figures concerning
its RES-E sector:
Table 2 Key figures for Portugal
Electricity consumption 2014
52 TWh (Eurostat, 2016), of which 2% imported (IEA, 2016b)
Electricity generation mix
hydro 30%, wind 23.3%, coal 23%, natural gas

12.5%, biofuel and waste 6.4%, oil 3.2%, solar
1.2%, geothermal power 0.4% (IEA, 2016b)
Target shares 2020
RES in gross final energy consumption
RES-E in electricity generation
31% RES,
60% RES-E
(Presidencia do Conselho de Ministros, 2013)
Actual shares 2014
27% RES , 52% RES-E (Eurostat, 2016)
Actual PV deployment 2014
415 MW, 627 GWh (DGEG, 2016)
NREAP planned PV deployment 2020
670 MW, 1039 GWh (Presidencia do Conselho de Ministros, 2013)
Portugals electricity production is highly volatile due to the high share of hydro power. The
country has developed an integrated Iberian electricity market with Spain MIBEL. Interconnector capacity is a relevant bottleneck to export electricity from the Iberian Peninsula. This
applies mainly to the connectors between Spain and France. Spain and Portugal have made good
progress towards their 3 GW interconnector capacity target for 2017, and MIBEL saw price convergence between the two countries for 85% of the time in 2014. In the wholesale market, the
four largest generators owned 61% of the installed capacity in 2013 (IEA 2016b).
Portugal reduced its planned PV deployment in its reviewed NREAP of 2013 as a result of the
economic crisis. Despite its favourable natural resource conditions, the country foresees only
670 MW of PV to be installed, of which 415 MW had been realised in 2014. However, with the
costs of PV installations continuing their rapid decline, the LCOE of large-scale projects are now
comparable to those of onshore wind in some areas of Europe. It is therefore a valid assumption
that PV will play a bigger role again in Portugal in the future.
26
Auctions to allocate support for RES installations have taken place in Portugal before. Three auction rounds for onshore wind were implemented between 2006 and 2008 (del Ro, 2016). Currently, no financial support is available for newly constructed large-scale PV installations in Portugal. PV parks can opt to enter the so-called General Regime, under which they sell electricity
in the market (MIBEL) or via bilateral purchase agreements. They enjoy dispatch priority but are
responsible for balancing. The Alternative Regime is foreseen to provide financial support via a
competitive multi-criteria auction mechanism in which projects bid a discount on the tariff published by the government (IEA, 2016b). However, no auction rules have been published and no
rounds were held so far. There is some pressure from industry stakeholders to introduce PV
auctions in the near future (APREN, 2016).
3.2

Belgium
Belgium has around 11 million citizens and is thus similar to Portugal in population size, albeit
with a much smaller surface area. Its RES-E sector is characterised by the following figures:
Table 3 Key figures for Belgium
Electricity consumption 2014
89 TWh, of which 21.5% imported (IEA,

2016a)
Electricity generation mix
nuclear power 47.2%, natural gas 27%, biofuels and waste, 7.9%, wind, 6.5%, coal 6.2%,
solar 4%, hydro 0.4%, oil 0.3% (IEA, 2016a)
Target shares 2020
13% RES,
RES in gross final energy consumption
RES-E in electricity generation
Actual shares 2014
20.9% RES-E
8% RES
13.4% RES-E
Actual PV deployment 2014
3024 MW, 2883 GWh (CONCERE-ENOVER,

2015)
NREAP planned PV deployment 2020
1340 MW, 1139 GWh (CONCERE-ENOVER,

n.d.)
27
Due to the geographical conditions, renewable energy potentials are comparatively scarce in
Belgium, and under the current technological possibilities mainly wind offshore and biomass
have a promising potential in the near future (IEA 2016a). Belgium plans 2 GW of offshore wind
by 2020 (CONCERE-ENOVER, n.d.) and had about 0.7 GW installed in 2014 (CONCEREENOVER, 2015). In 2014, Belgium had already installed more than twice as many PV capacities
as were planned until 2020 according to the Belgian NREAP.
Belgiums wholesale electricity market is gradually integrated into the Central Western European (CWE) region. Net imports accounted for 21.5% of electricity demand in 2014. Regarding
the market participants, Electrabel, the biggest company held around 66% of generating capacities, resulting in a very high concentration index of the market (IEA 2016).
RES are primarily promoted through a quota obligation with tradable green certificates (TGC)
for suppliers with a system of tradable green certificates. Three different regional
quota
schemes exist in Brussels, Flanders and Wallonia, all with technology-specific banding factors.
Under a quota scheme, the income stream from TGC is added to the income stream from selling
the generated electricity on the market. With TGC prices ranging between minimum prices of
65 /MWh and fines of 100 /MWh in case of non-compliance, and PV banding factors between
1.32 and 0.436 depending on installation size and region, PV installations can achieve support
levels of 40.5-132 /MWh.
With its quota scheme, Belgium is not under the same regulatory pressure to introduce auctions
as many other Member States which to date are still applying instruments with administratively
set support levels. However, in Europe a general trend away from quota schemes and towards
FITs and FIPs (administratively set or auction-based) could be observed in recent years. While
auctions for large-scale PV are currently not the subject of political discussion in Belgium, for the
sake of this hypothetical case study we assume that Belgium may be willing to introduce auctions in the future.
3.3
Design of a potential common auction
The following table lists some of the most relevant characteristics and design features which
need to be agreed on by the two participating countries before a common auction can be implemented.
Table 4 Recommended characteristics and design features for a potential common auction
Characteristic/
design feature
Description
28
Objectives of While the main intention of an auction scheme is to allocate support effithe
auction ciently, namely to the projects with the lowest generation costs, policy makscheme
ers can seek to achieve secondary objectives with regard to a certain geographical distribution, actor diversity, positive effects on domestic industry
or labour markets, or system integration. These can be considered in the auction via various design elements, for instance by additional criteria in the auction or by pre-qualification criteria. Implementing secondary objectives is
usually a trade-off against efficiency, as projects are not solely selected on
the basis of price.
Geographical distribution is an especially relevant secondary objective in international auctions, especially if the differences between LCOE in the participating countries are big, as is the case in this study. It can be expected that
most or all winning PV projects would be located in Portugal. While it may be
cost-efficient to award projects in the least costly locations, this can be difficult to communicate politically and may also not be efficient from a system
perspective. Contingents can therefore be defined to ensure that a minimum
share of the target volume is awarded in Belgium. Different maximum prices
have to be defined for contingents, as explained further below.
Auction
umes
vol- Portugal has a large potential of low-cost PV potentials. Even though planned
deployment volumes until 2020 are low, it is a reasonable assumption that
with sinking LCOE, PV will become an attractive option for target achievement again for Portuguese policy makers in the medium term. Similarly, financing PV installations in Portugal can also be attractive for Belgium. However, given the limited capacities installed to date, the Portuguese PV sector
is not very developed. If a reliable support scheme is set up, this will likely
attract project developers from other countries. Nevertheless, the auction
scheme should start with small volumes in order to build the PV sector slowly
while still ensuring sufficient competition. For instance, while 100 MW may
be a reasonably conservative volume for the first year of the auction scheme,
this could be scaled up to 300-400 MW/year within 3 years.
We assume that the two countries agree on a 30:70 distribution of generated
electricity because of the currently larger distance to target achievement
of Belgium. While Portugal will count 30% of produced PV electricity towards
its RES target, Belgium will use the other 70%.
29
Project sizes
As low support costs are a main consideration in both Portugal and Belgium,
and as auctions are only suitable for large-scale bidders, we recommend restricting the auction to large-scale free-standing PV installations. Germany
currently accepts projects with sizes of 100kW - 10MW in their pilot PV auctions (Bundesnetzagentur, 2016a), a range which would also be suitable for
a common auction between Portugal and Belgium.
Ceiling price
Ceiling prices are frequently applied in RES auctions and are strongly recommended, especially in an immature market such as Portugal where the level
of competition is difficult to predict. Setting the ceiling price at a level that is
neither prohibitively low nor too generous is challenging, however. Ceiling
prices should be based on a detailed LCOE estimate. As shown in Figure 6, we
estimate that large-scale PV may cost around 55 /MWh in Portugal in 2020,
while Belgium will have some locations with LCOE around 90/MWh. For an
auction held in 2020, a ceiling price set at 10% above LCOE would thus stand
at 60.5 /MWh. It is unlikely that any Belgian projects will be able to compete
at this price. Therefore, as mentioned above, it may be politically desired to
reserve a small share of the overall target volume for Belgian projects, subject
to their own ceiling price of 99 /MWh.
Auctioneers
An authority needs to be defined which will carry out the auctions. The winand contract- ners of previous auction rounds in Portugal signed PPAs with the Portuguese
ing authorities energy regulator Directorate General of Energy and Geology (Direco-Geral
de Energia e Geologia, DGEG), operating under the Ministry of Economics,
Innovation and Development (del Ro, 2016). In Belgium, the separate regional support schemes make the administrative landscape more complex.
Three authorities currently manage their respective quota scheme (res-legal,
2016):
BRUGEL, rgulateur bruxellois pour le march du gaz et de llectricit Brussels Regulatory Authority for Electricity and Gas
Vlaamse Regulator van de Elektriciteits- en Gasmarkt (VREG) Flemish Regulator of the Electricity and Gas market
Commission Wallonne pour l'Energie (CWaPE) - Walloon Energy
Commission
A common auction could be carried out by a Portuguese or one of the Belgian

regional authorities. Alternatively, an authority on Belgian national level
30
could be defined or a newly created international authority could be responsible for this task. Legal evaluations are necessary to assess whether an authority in one country would be legally competent to require pre-qualification
documents and apply possible penalties to an installation in the other country.
Effort sharing The effort sharing arrangement must be negotiated between the two counand payment tries. Given that we assume a 30:70 allocation of generated electricity to Pormechanism
tugal and Belgium, support expenditures could be divided according to the
same ratio. However, the arguments in favour of a different cost allocation,
as mentioned in the previous chapter, also apply here:
Firstly, regarding indirect costs and benefits, the additional system costs of
large amounts of PV have to be borne mainly by Portugal. On the other hand,
benefits such as labour market effects, local investments, and reduced air
pollution from replaced fossil fuel generation also remain there. Additionally
Portugal may face lower wholesale electricity prices which are beneficial for
consumers and a burden for conventional producers. Depending on how
highly these effects are valuated, compensation could be requested either by
Belgium or by Portugal.
Secondly, the willingness to pay is likely to differ for Belgium and Portugal. If
we assume that the majority of awarded PV projects will be situated in Portugal, this is likely to reduce support expenditures for Belgium. The Belgian
willingness to pay will be determined by the support expenditures which
would be caused by installing its own low-cost RES (most likely onshore wind)
on their own territory, which may be higher than the prices awarded in the
PV auction. Portugal, on the other hand, would have relatively low support
expenditures in purely national auctions and may be worse off sharing its
lowest-cost potentials with Belgium, especially if the auction also contains a
more costly contingent for Belgian projects. Portugal may therefore have a
lower willingness to pay than the prices realised in the common PV auction.
On the other hand Portugal will attract additional investments and economic
activity as listed above and therefore profit from indirect benefits, which is
the main rationale for sharing its low-cost potentials.
Both options for the organisation of payment streams would be possible for
this common auction: Plants can either receive support payments from their
local DSO, and compensation payments are made at TSO level or between
31
the countries at the end of the year; or a common fund can be created out
of which support payments are then taken.
Periodicity of The common auction scheme should adhere to a predictable and long-term
auctions
plan. The two countries should commit to these target volumes for at least
3-5 years and announce a reliable auction schedule. The regulator can retain
some flexibility by announcing only volume ranges for future rounds, and by
shifting some volumes between rounds to react to market developments.
Target volumes can be shifted between auction rounds in order to provide
some flexibility to the auctioneer.
For large-scale PV projects with a maximum size of 10 MW, the initial annual
auction volume of 100 MW can be split into two auction rounds throughout
the year. Later, when the annual volume is scaled up to 300-400 MW, three
rounds can take place per year. Auction rounds should be scheduled to take
place 2-3 times per year to avoid stop-and-go effects.
Type of sup- For this common auction, we recommend a sliding FIP based on a 3-month
port
weighted average of wholesale electricity prices in Portugal and Belgium. Figure 7 provides a numerical example of PV power plant Xs remuneration under different reference prices for two different time periods:
LCOE (c/kWh) = bid price of wind power plant X

3-month average market value for PV plants (c/kWh)
Average market value achieved by PV plant X (c/kWh)
Support payment (c/kWh)
Period a:
1.5
2.2
3.5
4.0
Belgium
3.3
2.0
2.2
5.5
Weighted
average
Portugal
Total remuneration of PV plant X

under
Reference price Belgium: 3.7 c/kWh (1.5+2.2)
Reference price Portugal: 5.7 c/kWh (3.5+2.2)
Reference price average: 4.4 c/kWh (2.2+2.2)
Period b:
2.5
2.0
2.3
3.0
Belgium
3.5
Portugal
3.2
Weighted
average
3.4
5.5
Total remuneration of PV plant X

under
eference price Belgium: 5.9 c/kWh (2.5+3.4)
Reference price Portugal: 5.4 c/kWh (2.5+3.4)
Reference price average: 5.7 c/kWh (2.3+3.4)
32
Figure 7 Example of plant remuneration under different reference prices
At least in the medium term, Belgian and Portuguese electricity prices can be
expected to diverge often, as interconnection capacities are a relevant bottleneck, especially on the French-Spanish border. As shown in the figure, this
poses some risk to PV power plant X. We assume that this plant is situated in
Portugal. We further assume that the plant is able to achieve slightly higher
market values in period A than the average Portuguese PV plant (depending
on plant design and management, the opposite may be true for other plants
and other time periods). In case the Portuguese market value were used as
reference, the plants remuneration would thus be slightly higher than its
LCOE in period A. With the weighted average used as reference, however, the
plant gets paid a lower premium and ends up with a remuneration below its
LCOE despite having realised market values which were higher than those of
other PV plants in the same market area. In period B, average market values
in Belgium are lower than in Portugal. At the same time, plant X happens to
realise slightly below-average market prices compared to other Portuguese
PV plants. Because of the low Belgian market values, using the weighted average as reference is favourable for this PV plant, as it leads to higher support
payments. The total remuneration for our plant is higher than its LCOE, despite it having achieved slightly below-average market values.
However, apart from this, the producers face no unproductive risk, thus making this option more attractive than a fixed FIP. Risks to the two paying Member States are also limited.
Auction
mat
for- Assuming auction target volumes in the range of several hundred MW, onshore wind projects are usually small in comparison and a number of projects
is thus needed to fill the volume. As onshore wind is a rather mature technology, a large number of projects is typically in the development pipeline at any
given time. A multiple-item auction format thus tends to be more suitable
than single-item auctions. In multiple-item auctions, the auctioneer defines a
target volume and accepts all projects in order of their award score until the
volume is full.
Auction type
Auctions can be static, meaning that each bidder submits one binding sealed
bid, or dynamic using an ascending or descending clock. Each type has its
benefits and drawbacks. In dynamic auctions, bidders can observe their competitors behaviour and thus obtain information about them, decreasing the
risk of winners curse but also increasing the risk of implicit collusion. Static
33
auctions, on the other hand, are less complex and can therefore be more appropriate for inexperienced auctioneers and bidders. While most auctions in
the RES sector so far have been of the static type, dynamic RES auctions exist
in the Netherlands and a hybrid type has been applied in Brazil (Frster and
Amazo, 2016).
The wind auctions previously held in Portugal were static (del Ro, 2016). For
a hypothetical common auction with Belgium, we suggest a static type, as it
is less complex and as at least one of the participating countries already has
some experience with it.
Pricing rule
Static multi-criteria auctions can have a uniform pricing rule, paying either
the highest accepted bid price or the lowest rejected bid price to all awarded
bidders; or a pay-as-bid rule in which awarded bidders receive different
prices. Again, both options have benefits and drawbacks. Under strict theoretical requirements, uniform prices (lowest rejected bid) are incentive-compatible, meaning that they incentivise bidders to bid at their true cost. In practice, however, these strict requirements are almost never satisfied. Uniform
price rules can lead to strategic supply reduction in case multi-project bidders
are present, and to irrationally low bidding, especially among inexperienced
bidders, thus possibly resulting in projects not being realised. Germany has
tested both price rules in its pilot PV auctions of 2015/2016, with very similar
outcomes (Bundesnetzagentur, 2016b).
We recommend that the common PV auctions start with a pay-as-bid rule.
Pricing rules could be changed in later rounds to observe the resulting effects.
Pre-qualification criteria
and penalties
As for any RES auction, a careful design of pre-qualification criteria and penalties are strongly recommended. All bidding projects should be required to
have grid access and construction permits in order to ensure that only projects with good chances of being realised can submit bids. All projects should
submit a first bid bond upon entering in the auction. Awarded projects should
be required to submit a second bid bond. Bid bonds are not to be returned in
case of non-realisation, thus ensuring that only serious bidders take part in
the auction.
34
3.4
Expected performance of a Portuguese-Belgian auction scheme
This section provides a brief assessment of the hypothetical common auction with regard to a
number of assessment criteria.
Effectiveness
A well-designed common auction has the potential to achieve higher policy effectiveness than the
existing Belgian quota scheme and or the General Regime currently in place in Portugal. In order
to ensure good effectiveness, the auction scheme must, amongst others, follow a reliable and
predictable schedule to provide security to investors, and have well-designed pre-qualification
criteria and penalties in order to ensure that awarded projects are built within the realisation deadline.
In addition, barriers outside the auction must be removed or minimised. Especially in the case of
Portugal, this includes grid bottlenecks making it difficult to export electricity out of the Iberian
Peninsula.
Static efficiency
The common auction can be expected to have higher static efficiency than the Belgian quota
scheme. While a technology-neutral common auction would ensure that low-cost projects from
other technologies also get awarded, the static efficiency of a large-scale PV auction can also be
considered relatively high given recent LCOE developments.
Dynamic efficiency
With a predictable schedule for several years in advance, the common auction provides security
for investors and eliminates the majority of unproductive risks, thus incentivising further cost reductions within the technology. Dynamic efficiency can therefore be considered higher than under
the Belgian quota scheme or the Portuguese General Regime. A common auction scheme may
also be perceived as less prone to retroactive changes than purely national auctions, thus further
improving investor security.
Distributional effects and minimisation of support costs
The common PV auction has the potential to reduce support costs especially for Belgium which
gets access to Portugals low-cost PV potentials which Portugal by itself would not fully exploit.
Actor diversity
Experience from the German large-scale PV pilot auctions indicate that a variety of actor types
participate, including cooperatives and other small actors (Bundesnetzagentur, 2016b). Actor diversity can be improved by reducing transaction costs and barriers for small actors, for instance
by providing simple, easily accessible information on the auction procedure online. Actor diversity
is expected to be similar to that under current Portuguese and Belgian policies. Potentially, actor
35
diversity may increase if for example Belgian project developers are attracted to become active
in Portugal if the design of the common auction considers elements that are suitable for Belgian
companies.
36
Policy Implications and General Recommendations
Member States should be given freedom to design their own auctions. Nevertheless, some best
practice design features should be included in the new RES directive. In this section, we therefore provide some recommendations on which aspects of auctioning should be regulated by RED
II and which should be left to Member States. These recommendations are partially inspired by
the case study analysed in this report and partially draw from the general policy debate also held
in EU research projects such as AURES and Towards20304. Many of the following recommendations apply to national as well as international auctions.
Requirements on type of support

The analysis in this study concludes that sliding FIPs are the preferred instrument for national
auctions, and most probably also to be preferred over fixed FIPs in international auctions. The
complexities caused by sliding FIPs in international auctions should be understood as a further
incentive to push forward market coupling and to increase interconnector capacities in order to
achieve increasing convergence between wholesale electricity prices. The latter could be
achieved by defining reference prices of sliding premium systems based on the average price of
the participating countries. Nevertheless, RED II should not contain a hard requirement to apply
sliding FIPs. Member States should be free to apply new and innovative types of support, as long
as they remain compatible with State Aid regulation.
Support should be designed so as to shield RES projects from unproductive risks but at the same
time ensure market integration. Mandatory direct marketing should be foreseen in the design
of the support instrument, and installations should have an incentive to cease production when
prices fall below the negative value of the support level per generated unit, which is the case for
FIP and investment grants.
RED II may recommend sliding FIPs, but should let Member States decide on the type of support they want to allocate via their auctions.
RED II can include a requirement that auctioned support payments should be designed so as
to incentivise RES producers to stop feeding electricity into the grid as soon as market prices
become lower than the negative value of support.
4 see forthcoming publications both by the Horizon2020-funded AURES project and by Ecofys based on
research for the German Federal Ministry for Economic Affairs and Energy.
37
Technology specificity
Technology-neutral auctions lead to higher static efficiency in the sense that generation costs
are minimised if only the lowest-costs projects across all technologies are selected. On the other
hand, this approach does not necessarily select those technologies which lead to lowest overall
system costs. In addition, technology-specific support leads to better dynamic efficiency. Member States may also want to conduct auctions in which technologies with similar LCOE compete
against each other. However, this makes it more difficult to set the parameters of the auction,
especially with regard to pre-qualification criteria and realisation deadlines, more difficult.
The new RES Directive should give freedom to Member States to implement technology-neutral, technology-clustered, or technology-specific auctions.
Exemptions from auctions

Member States may want to exempt certain parts of the RES-E sector from auctions and apply
administratively set support instruments to them. This applies to mainly two areas:
Immature technologies which have still not achieved high market penetration rates or are
still in the demonstration phase; or small installations and/or small actors which fall under
pre-defined de-minimis thresholds
national markets which may be considered immature even if the technology in question is
already mature in other markets. If a national market is too small to lead to sufficient competition in an auction, support levels may better be set administratively.
International auctions can be a way to combine a small market with a larger one in a different
country, thus making auctions feasible there. However, this should be a voluntary process and
not prescribed by RED II.
For those installations which are exempt from auctions for the above reasons, RED II should
define practices. These may for instance include LCOE calculation methodologies as the basis for
administratively set support levels, or regression of support levels based on automated formulas.
RED II should allow Member States to exempt actors from auctions if they belong to actor or
project size categories that are especially disadvantaged by auctions, or to immature technologies.
RED II should permit Member States to apply alternative support measures if an ex-ante feasibility study finds that auction results will be poor in this specific market for a specific technology, regardless of installation size, type, or technology maturity.
RED II should define best practices for the support given to exempted segments.
38
Secondary objectives
While the bid price should be the main selection criterion in an auction, Member States should
be allowed to incorporate secondary objectives in their auction designs, concerning for instance
geographical distribution, labour market effects, actor diversity, or industrial policy. The most
relevant secondary objective for international auctions will most probably be the partial steering
of geographical distribution.
RED II should permit Member States to apply secondary objectives in their auction schemes,
provided that these are well-justified and that cost efficiency remains the main objective.
Auction design elements

While we suggest a static multiple-item auction with a pay-as-bid rule for the above case-study,
other options may be suitable for other cases. We therefore suggest that Member States should
be able to choose their own auction type, auction format, and pricing rule.
The exact scheduling of the auction is dependent on the technology, the specific market, and
the target volumes and should thus not be prescribed by RED II. However, Member States should
be required by RED II to submit an auction schedule over several years.
While the target volume is defined in terms of MW in the case study, Member States should be
allowed to choose between a capacity, generation, or budget volumes in their auctions.
Member States should be required to set a ceiling price above which no bids will be accepted in
the auction. In combination with the volume control inherent to auctions, this ensures predictability of support expenditures for the regulator. While Member States should set the ceiling
price themselves, RED II should contain some guidance and best-practice examples on estimating LCOE and the related setting and period adjustment of ceiling prices.
Member States should be allowed to limit bidder concentration by defining a maximum share
of awarded projects per bidder per auction round.
The design of pre-qualification requirements and penalties is crucial for the success of an auction. RED II should require Member States to require both material pre-qualifications (for instance construction and grid connection permits) as well as material pre-qualifications such as
bid bonds which will be kept by the auctioneer as a penalty in case a project is delayed or fails
to be realised. The exact design of these elements, however, is very case-specific and should be
the responsibility of Member States. Member States should be required to provide arguments
for their pre-qualification requirements to prevent unjustified exclusion of certain actor or project groups.
While it is in principle possible to trade the support rights after having won them in an auction,
Member States should be allowed to limit such transferability if they wish.
39
Auction rules should be flexibly adaptable by Member States. RED II should give guidance on
certain design elements such as ceiling prices and auction periodicity. It should require Member States to include penalties and pre-qualifications in their auctions, but not prescribe a
specific design.
International auctions
The opening of auctions is a complex endeavour which can lead to economic benefits if designed
well. However, in some Member States it can be politically difficult to communicate. Fears of
being forced to open their support scheme can lead national decision makers to very cautious
policies, thus negatively influencing the effectiveness of even national support schemes. Member States should therefore explicitly be allowed to determine the degree and timing of a possible opening by themselves. RED II can encourage Member States by providing detailed descriptions and guidelines on opened auctions.
RED II should not prescribe the time and degree of opening of auctions. However, it can make
the opening process easier for Member States by providing a description of options.
Accessibility of auctions
When preparing auction rounds, Member States should be required to set up appropriate preparatory processes involving stakeholders. RED II can give guidance on such processes, i.e. time
lines for consultation processes, bid preparation, project realisation times, warning mechanisms
for delays, etc.
Once auctions are implemented, REDII should require that adequate participation-enhancing
measures are taken. REDII may provide examples for these measures, including English language
tender materials, international stakeholder dialogue meetings, easily accessible web-based auction portals, etc. This is especially relevant in mutually opened auctions.
RED II should require Member States to take measures that enable stakeholders to participate
in the design of auctions and have easy access to auctions.
Retroactive changes
40
Retroactive changes have been shown to cause disruptions in RES markets and to severely reduce investor confidence in the past. It is one of the clearest lessons from RES policy in past
years that such changes should be avoided. This applies equally to auction schemes. International auctions may be perceived by investors to be less likely to be changed retroactively, as at
least two Member States need to agree on such changes. Nevertheless, we recommend that
RED II specifically require Member States to avoid such situations.
RED II should include a clause which forbids Member States to implement retroactive
changes.
41
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International Auctions for Renewables

commissioned by the European Copper Institute

Executive Summary ..................................................................................... iii

Introduction and Background ............................................................... 1

Designing international auctions .......................................................... 9

General benefits and challenges in international auctions ...... 9

Reciprocally opened auctions .............................................. 15

Commonly held auction ....................................................... 18

Case study: Common auction between Portugal and Belgium ........ 24

Market characteristics and existing support scheme in

Market characteristics and existing support scheme in

Design of a potential common auction ................................. 27

Expected performance of a Portuguese-Belgian auction

Policy Implications and General Recommendations ......................... 36

Commonly held auctions

Required degree of coordination/ negotiation

High. Participating Member States need

Very High. Participating Member States

To be negotiated. Participating Member

Potentially complex. Mutual agreement

Good. Common auctions can be held by

High, especially as more Member States

Slightly reduced as compared to national

Reduced due to international agreement. Especially in cluster constellations

Member States should be free to implement technology-neutral, technology-clustered, or

Introduction and Background

Price level setting

Price setting mechanism: Auction

Sealed bid/descending clock/hybrid

Figure 1: Levels of design elements. Source: del Ro et al., 2015, p.9

Technology-specific vs. technology-neutral

Size-specific vs. size-neutral

Constant or decreasing support level throughout support period.

Single-item versus multiple-item auction

Regularity of auctions, i.e. one-off or recurring minimum and/or maximum price

Technology-specific versus technology-neutral support

Type of Support Payments

Total revenue (hourly)

Total revenue (monthly average)

Designing international auctions

A note on target achievement

only installations from those Member States can apply

to lower the costs of target achieve-

which in turn have opened their national auctions to

ment. In the time frame until 2020,

ber States will hold an auction which is open to installa-

Directive 2009/28/EC. For the post-

tions from the participating countries. These common

2020 period, we use the term target

This chapter will first present benefits and challenges

this means the achievement of the

to refer to a Member States planned

General benefits and challenges in international auctions

albeit at differing conditions depending on the location of their planned project

Setting the target volume

Volume in country A: 0 MW support expenditures 0

Volume in country A: 0 MW support expenditures 0

Figure 3 Influence of electricity market prices on support expenditures

pre-qualification requirements adapted accordingly. Where possible, policy makers should

Reciprocally opened auctions

Setting the target volume

Support expenditures, support type, and the reference electricity price

Market value (/MWh)