Learnings from international PV tendering processes

11 Oct, 2016

When defining the price settlement mechanism for renewable energies, the main aspects that policy-makers have to take into account are, on the one hand, that an adequate price should be set and, on the other hand, that the meeting of the volume objectives should be guaranteed.

So far, the most popular mechanism include uniform pricing systems, green certificates, state-aids and tenders, each of which has positive and negative aspects.

At an international level, tenders have recently become the most popular mechanism when it comes to assigning new renewable energy volumes. This is due to two main reasons: on one hand, in its state-aid guidelines the European Union has claimed the need for countries to adopt a market philosophy. The EU also requires that, starting from January 2017, most of the new volume installed is set in technology-neutral tenders. On the other hand, more and more countries, such as the ones in Latin America and in the Middle East, are currently choosing to carry out tenders, a trend that explains why this mechanism has become very popular. Actually, tenders have been the first scheme to foster the development of renewable energies also in Europe, especially in countries such as the UK, France or Ireland.

The case of Spain is somehow different, because it has adopted a tendering mechanism with a marginalist feature. In this model, the remuneration is defined based on the highest bid that has been presented, therefore, if an applicant’s bid is 2, and the last applicant’s bid is 4, the project will be assigned to the first applicant but with the highest price bid, that is 4.

This is the first important negative aspect of a marginalist scheme, because applicants can be tempted to carry out under-bidding strategies, hoping that the final price will be set on a higher bid made by other applicants.

In order to design effective tendering processes, there are several different features that need to be considered.

First of all, the price settlement scheme should be based on the pay-as-bid mechanism, that is more secure and that ensures that the bid corresponds to the final pricing.

Secondly, volumes should be assigned based on the price for kW/h produced, and not according to the investment costs, as this is the only way to prevent inefficient plants and projects from being assigned volumes.

Moreover, tenders should be technology-neutral – in this system all technologies can compete in equal conditions, therefore the more competitive will win.

Other important elements that should be considered are that a transparent tendering process as well as streamlined administrative procedures should be guaranteed, to facilitate cross-borders tenders in the long-run. Moreover, an adequate long-term tendering planning that defines the volumes of renewable energy needed in the system is necessary, as it will help encouraging investments in this sector.

PV has reached such a high level of maturity that it can now compete in technology-neutral tenders, as every other technology does. A clear example is provided by recent tenders carried in Mexico, where PV gained a great percentage of the projects with competitive prices.

These good results PV has achieved at international level are in contrast with what it is happening in Spain. At the beginning of 2016, the Government has carried out the first tender since the moratorium in 2012, where only wind and biomass energy could participate. PV was inexplicably left out.

With the ultimate goal of meeting the 2020 objectives defined by the EU, the Spanish Government has recently announced the intention to reactivate tenders, where PV will be able to compete, which opens up new opportunities for the sector.

We hope that the Government will make the most of the recent international experience, choosing the most efficient tendering process scheme and giving investors the right message to reactivate investments.

Article was provided by the UNEF (Spanish Photovoltaic Union)