While I’ve written extensively about feed-in tariffs as a policy mechanism for rapidly developing renewable energy, I’ve written very little about various forms of bidding systems. There’s a reason I don’t write about them. Long ago I concluded that bidding systems, in all their incarnations (Requests for Proposals, Tendering, Auctions, and so on), are not reliable mechanisms for developing renewable energy fairly and at a fair price.
Others far more capable than me have analyzed or commented on bidding programs around the world. I won’t duplicate their work here. Instead I will simply provide some pointers where to look for information on bidding and whether it has been successful or not.
My opinion on bidding systems was determined primarily by the failure of the Non-Fossil-Fuel Obligation (NFFO) in Great Britain, Project Eole in France, the Ontario Ministry of Energy’s Request for Proposals (RFP), and the many different utility-administered programs in the US.
Bidding systems rarely result in actually building the amount of capacity called for. Typically the failure rate is 50%. There is always a “force majeure”, an excuse for winning bidders who conclude that they can’t or won’t build a project for the price bid within the time allotted.
Moreover, bidding is exclusionary. By the necessity of insuring that bidders can actually build what they say they can build, only the largest players can participate, resulting in the further concentration of an already highly concentrated industry.
Because contracts to generate renewable energy are a coveted commodity, awarding the contracts through bidding is anti-democratic and anti-competitive, despite the rhetorical use of the politically-charged term “competitive bidding”.
Below are some links to reports on the failure of bidding systems. Additional links will be added as time permits.
For perspective, 20 of the European Union’s 27 member countries use feed-in tariffs as the principal mechanism for meeting their renewable energy targets. An additional three countries use feed-in tariffs for selected technologies, often solar photovoltaics.
- Answers to common questions about Renewable Energy Tariffs (Feed-in Tariffs) and Bidding (RFPs)
- Penny-foolish or Pound-wise: The Case of Renewable Electricity Policy–Under an auction-based system, an incentive is created for bidders to bid as low as possible in order to increase their chances of securing a contract. Recent experience from jurisdictions such as China and Brazil suggests that underbidding is widespread, and contract failure rates remain high, leading to slower growth.
If repeated over several auction cycles, this process can be timely, costly and highly inefficient, both for regulators and investors, and can effectively undermine investor confidence, as well as a jurisdiction’s ability to meet renewable energy targets on time. . .
- Renewable Energy Policy Mechanisms–While Tendering systems theoretically provide optimum economic efficiency in providing the lowest-cost generation, this is not always true in practice. Moreover, Tendering leads to stop-and-go development cycles not conducive to stable growth or dynamic markets. Emphasis on low cost results in a greater risk that winning bids may not be built, as seen in Britain’s NFFO and France’s Eole programs. A significant amount of capacity was awarded contracts in Britain, California, and France, but was never built. . .
The results are quite similar to those of France’s Eole program, where only 70 MW were built of the 300 MW contracted. Of that, only 30 MW are operating under the original contract. The remainder have switched their contracts to Renewable Tariffs. The poor performance of the Eole program is the principal reason France switched to Advanced Renewable Tariffs for projects less than 12 MW. . .
The risk that bidders will walk away from winning bids can be mitigated by careful design of the Request for Proposals and the inclusion of substantial penalties for non-fulfillment of the contract. To avoid this and other risks from bidders gaming large Tenders, bids have grown increasingly complex.34 As the complexity of Tendering has grown, so too have the costs to administer Tenders as well as the cost to bid into a Tender. . .
The qualification to bid document in Ontario’s first wind RFP in 2004 was 120 pages long. . .
- Minimum price system compared with the quota model – which system is more efficient?–Quota systems are ineffective and expensive. Expansion falls far short of its targets. Prices for wind electricity are considerably higher than in countries with a minimum price system. They cause sizeable windfall gains. Small and medium-sized businesses are structurally disadvantaged. Up until now no large independent industrial sector has emerged in these countries for the manufacture of renewable energies. They jeopardise acceptance of renewable energy. . .
- The Canadian Wind Energy Association (CanWEA) Says Feed-in Tariffs are Best–CanWEA criticizes RFPs and calls for procurement mechanisms that reflect best practices worlwide: feed-in tariffs. The comments are made in CanWEA’s WindVision 2025, a report that lays out CanWEA’s vision of where and how wind energy can be developed in Canada. . .
“In most of Canada, provincial governments have directed Crown utilities to procure increasing amounts of wind energy and other renewables through competitive tendering. At face value, it makes good sense to contract for renewable energy supplies at the lowest possible cost. On closer inspection, however, current procurement practices can have unintended consequences which make it harder to capitalize on wind power’s full potential. . .
- Wind power breaks down in Nova Scotia–The RFP process is widely regarded as a failure among renewable energy producers. . .
- Powering Ontario Communities (OSEA’s May 2005 Report to the Ministry of Energy on Standard Offer Contracts)–The small/community-based renewable energy sector did not participate in the Ministry’s 300 MW renewable energy Request for Proposal (RFP). The RFP’s complex bidding process posed a significant barrier for farmers, community groups and others with small renewable power projects interested in helping the province meet its renewable energy targets. . .
The RFP, by its emphasis on price and price alone, discriminated against smaller projects. In a competitive bidding process, larger projects in the 50-100 MW range could outbid smaller projects on price, even though these smaller projects can offer other important financial and non-financial benefits. The price-only approach also precluded more expensive renewable technologies such as solar photovoltaics from bidding. . .
- Comparison of Feed in Tariff, Quota and Auction Mechanisms to Support Wind Power Developmentby Lucy Butler and Karsten Neuhoff, University of Cambridge–This study reaffirms numerous other papers on the topic. Most important are the conclusions that tendering systems may not result in the contracted capacity and that an RPS with ROCs can result in higher costs than feed laws.
Data on prices in Germany and Great Britain “. . . does suggest that the price paid for wind energy is already lower in Germany than in the UK, and that this is likely to remain the case over the medium term.” . . The study noted that only 30% of contracted capacity under Britain’s tendering system was actually installed, “. . . although the government awarded contracts for 3,270 MW in England and Wales between 1990 and 1998, figures for September 2003 show only 960 MW.” The results are quite similar to those from France’s Eole program where only 70 MW of 300 MW contracted were actually built.
Moreover, the price bid under such tendering systems may not be representative of true costs because so little of contracted capacity is built. “It is thus questionable whether a competitive tendering process, which places such emphasis on reductions on the price paid for wind energy, is the most appropriate means of encouraging an expansion in capacity”, say the authors.
The study concludes that the oft-stated reason for Britain’s poor installation rate of wind energy due to planning hurdles was incorrect and to the contrary the reason was an insufficient price to pay for profitable projects.
- WWF-UK Response to the Government Consultation on the Reform of the Renewables Obligation (Part 1)–Feed-in tariffs have been proven to be successful elsewhere (for example, Spain and Germany) in generating significant deployment of lower cost renewable energy. A fixed mechanism addresses both the time delay of the RO and the leakage associated with transferring the regulatory risk to the private sector. It is the most efficient policy mechanism in terms of funding requirement per unit of renewable energy.”
- Carbon Trust Calls for Urgent Changes to Britain’s Renewable Obligation–Significantly, the report Policy frameworks for renewables Analysis on policy frameworks to drive future investment in near and long-term renewable power in the UK says “not only are targets being missed, but the cost of installed renewable energy is higher than necessary.” The Trust goes to say it “believes that the Renewables Obligation (RO) should be reformed or replaced.”
- The U.K. NFFO and Ireland AER Competitive Bidding Systems–While the basic structure of the NFFO and AER has merit, and the results of the solicitations have been widely lauded as encouraging efficient cost reductions, the NFFO and AER processes have also been strongly criticized. This criticism is based on the observation that the majority of winning bidders have been unable to bring their projects on-line. Out of 3271 MW of awarded contracts, only 821 MW has been installed a success rate of just 25% so far. AER results are similar. (page 3)
- Building a Margin of Safety Into Renewable Energy Procurements: A Review of Experience with Contract Failure–In total, the NFFO/SRO tenders have yielded an overall completion/success rate of 50 percent on a project basis and just 33 percent on a capacity basis. (page 31)
- Building a Margin of Safety Into Renewable Energy Procurements: A Review of Experience with Contract Failure–We find some weak evidence that capacity-based success and failure rates have changed somewhat over time. Though capacity-based success rates among California QF contracts from the 1980s averaged only 45 percent, for example, contracting success rates were seemingly on the rise in the late1980s and early 1990s (up to 60 92 percent nationwide). Data collected on recent utility experience shows a capacity-based success rate of just 53 percent (considering online and on-schedule projects). If projects that are not achieving their performance goals are also included as successful projects, however (leaving only cancelled projects and those that are significantly delayed and not yet on-line as failures), then the success rate jumps to 62 percent. (page 40)
- Gunther Portofolio: California Reversal of Feed-in Tariff Auction Proposal–PUC allowing lowest price over quality, time, and open, transparent markets? –And the talk of market mechanisms falls flat when auction bids are not disclosed once the auction is over:
“The price of each individual bid will be confidential, but staff will release auction bid information on an aggregated basis to the extent it does not violate CPUC confidentiality rules.”
Let the games begin! After also learning about confidential CPUC testimony, I am beginning to think revised Sunshine Laws are required here.
By contrast, Feed-in Tariff rate schedules are open and public information. Degression also guarantees FiT rates decline over time based on the expected manufacturing learning curve. . .
- Sierra Club California Comments on the Renewable Auction Mechanism–The RAM design is intended to minimize the cost paid for smaller scale renewable energy projects. However, it does this by creating substantial market risk to project developers, which in turn increases the developers’ costs. Thus it will simultaneously create pressure to reduce price while increasing cost. We do not see this as an ideal design feature. The RAM design, in our view, will tend to favor larger projects in optimal resource areas. This will significantly reduce the overall market potential for DG in the RPS program since smaller projects, and projects in less than optimal resource areas, will be at a competitive disadvantage, and many of these will not be able to compete at all. . .
- The Use of Feed-In Tariffs To Set Fair Power Prices for Renewable Energy Producers–During the 1990s, competitive bidding was introduced in some regulated states in an attempt to prevent these problems. But since some power producers were offered a fair price while others were offered no price at all, favoritism was most often the result, especially since the utilities were given the power to select the bids of their friends.
Competitive bidding is a misnomer since competition cannot exist in an environment of favoritism. While competitive bidding could be limited to objective bidding criteria such as price (like PURPA), a potential problem is that winners could be unreliable suppliers while reliable suppliers are blocked out of the market.
- California or Bust: the Wind Energy Rush of 99?–It takes men and women of steel to play the bidding game. The bets on new technology, on new permits, and on long-term financing are risky. The stakes are high too. A false move–a card mislaid–could spell a showdown in the street, and only those with the fastest attorneys will survive. One shootout to watch closely pits an upstart “clever bidder” against the state’s heavily-armed utilities at the PUC’s corral in San Francisco. The outcome could well determine who gets what capacity and at what price. . .