Cross-border renwables auctions. Germany's opening of the EEG

by Felix von Blücher

September 15, 2016

Germany’s opening of the EEG

Cross-border renewables auctions

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Background – Why cooperate on renewables support?

Gains from cooperation:

> Cost efficiency: RES deployment where potential is high

> Using regional synergies/portfolio effects (e.g. diversification of RES)

> More competition (especially for small Member States)

> Policy/knowledge transfer

Felix von Blücher15/09/20162

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Background – Why cooperate on renewables support?

Source: “Cooperation between EU MemberStates under the RES Directive”, Klessmann et al. (2014)


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Background – EU Commission versus Member States


> Internal energy market

> Harmonisation of energy

policy

> EU-Quota/Harmonisation of

RES support

> Energy mix under national

sovereignty

> Member States are reluctant

to coordinate their policies

> Fragmented national RES

support instruments

EU Commission Member Statesversus

No European solution for challenge of transforming the energy system

Potential gains of policy coordination remain untapped

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Content

I. A new push for renewables cooperation in Europe

II. Germany’s opening of the EEG

1. Implementing “reciprocity”

2. The German-Danish test case

III. Challenges of conducting cross-border auctions

1. Deviating market conditions

2. Differing preferences for support systems

IV. Conclusions


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Ecofys‘ expertise in renewables auctions and cross-

border cooperation

Ecofys has a strong track record in designing renewables cooperation and

renewables support policies:

> Supporting the set-up and design of cooperation:

– The Federal Ministry for Economic Affairs and Energy

– European Commission: “Cooperation between EU Member States under the

Renewable Energy Directive and interaction with support schemes”

(http://res-cooperation.eu/)

> Supporting the implementation of auctions for renewable energy support:

– The Federal Ministry for Economic Affairs and Energy

– European Commission: AURES (AUctions for Renewable Energy Support)

(http://auresproject.eu/)


http://res-cooperation.eu/

http://auresproject.eu/

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I. A new push for renewables

cooperation in Europe

15/09/2016 Felix von Blücher

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Renewables Cooperation in Europe

> The EU Renewable Energy Directive (Directive 2009/28/EC) introduced

three cooperation mechanisms:

– Statistical transfer

– Joint projects

– Joint support schemes

> Primary aim: facilitate achievement of 2020 renewables targets through

financing RES generation in Member States with lower-cost RES

potential

> Very limited use of cooperation mechanisms so far:

– Joint support scheme between Sweden and Norway

– Some countries explore statistical transfer


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Reasons for limited use

> Political barriers:

– Public acceptance

– Uncertainty on continuity of the RES framework beyond 2020

> Technical barriers:

– Uncertainty on costs and benefits

– Uncertainty on design options of cooperation mechanisms

– Lacking transmission infrastructure and market integration

> Legal barriers:

– Potential incompatibility of cooperation mechanisms with national legislation


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RES cooperation is gaining momentum

> State Aid Guidelines for Environmental Protection and Energy 2014-

2020:

– Several Member States are being forced to open their support (non-

discrimination of foreign RES electricity, Art. 30/110 TFEU)

– Strong push for convergence of national support schemes based on auctions

(default by 2017)

> Cooperation may be key element of the new EU Energy framework:

– Council Conclusions 2014: 2030 governance system shall “facilitate

coordination of national energy policies and foster cooperation”

– New Renewable Energy Directive may contain further provisions


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Agreement between Germany and EU Commission

> State aid clearance for EEG 2014:

– As of 2017: Germany to open 5% of the newly installed capacity („partial

opening“) = 250 MW per year

> In 2016: „Pilot Opening” Auction For Ground-Mounted PV:

– Developing a concept for the opening

– Test case: carrying out first cross-border auctions of up to 100 MW

– Lessons learned will help to set the rules for opening up auctions for other

renewable technologies (partial opening)


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Requirements for the opening

Three requirements for the opening

(§88, section 2-4 EEG 2014):

1. Principle of reciprocity

2. ‘Physical’ import or comparable effect

3. Cooperation agreement


Requirements for the opening:

1. ‘Physical’ import (electricity delivered to DK)

2. Cooperation agreement

Obligation to open 5% as of 2017

= 250 MW pa

Pilot 2016 = up to 100 MW

Obligation to open 6% of the

tendered capacity in 2015 & 2016

= 2,4 MW in 2016

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1. Implementing “reciprocity”


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Reciprocity – Basic models to open an auction

1. „Unilateral opening“ – Only one country opens its support

scheme; the partner country contributes to the support

payments.

2. „Mutual opening“ – The cooperation countries both open their

domestic auction schemes to another.

3. Joint auction with separate support scheme – The

cooperation countries set up a joint auction, awarded projects

are then assigned to one country’s support scheme.

4. Joint auction with joint support scheme – The cooperation

countries set up a joint auction and a joint support scheme

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1. „Unilateral opening“ – Only one country opens its support


payments.




cooperation countries set up a joint auction, awarded projects are

then assigned to one country’s support scheme.



Option 2 and 3 shall be tested in the German pilot opening


In

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1. „Unilateral opening“– Only one country opens its support


payments.




cooperation countries set up a joint auction, awarded

projects are then assigned to one country’s support

scheme.



Germany and Denmark will conduct “mutually-opened” auctions


In

ten

sit

yo

f co

op

erati

on

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Mutual opening – Basic concept

> Mutually-opened auction:

– Two countries each open their separate auction to bids from the

partner country

– Relatively easy because each country sets out the conditions for its

own auction

– Agreement necessary on basic parameters but not on the details

– Large flexibility for each auction design


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2. The German-Danish test case


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Danish-German Test Case

> Danish-German test case:

– First of its kind

– Test case character: single pilot auction

– Intensive exchange on conditions, auction design, information exchange etc.

– Involved: Ministries, agencies, regulators and TSOs

> Cooperation agreement signed summer 2016:

– Sets the basic conditions of the cooperation

– Data exchange

– Cross-border payment of support

– Accounting of RES production for national target achievement


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Danish-German Test Case

> Danish-German auctions:

– Technology: DE: PV (only ground-mounted)

DK: PV

– Volume: DE: 50 MW, all is auctioned cross-border

DK: 20 MW, up to 4.799 MW auctioned cross-border

– Physical import: direct interconnection

– Accounting of

RES production: towards funding country


© hydyl/Thinkstock

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Which rules apply?

> Starting point: national auction design of each cooperating state

> Agreement on some basic parameters (volume, etc.)

> Basically: each country sets out the support conditions for its own auction

(market premium, etc.)

> Deviations from national auction design necessary in case rules are not

applicable in cross-border context (material pre-qualification criteria, etc.)

or against interests of cooperating country

> Bidders must know all conditions up front

> Rights and duties should be the same for all bidders, however no

alignment of exogenous conditions


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1. Deviating market conditions


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Challenge: Deviating market conditions

> Market conditions are more heterogeneous in cross-border auctions

> In auctions, only the lowest bids will receive support

> Challenge: public acceptance problems if all successful bidders come from

only one of the participating countries (trade-off between efficiency and

acceptance)

To what extent do we need to „level the playing field“ by aligning

framework conditions to ensure a balanced auction result?


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Conditions that influence LCOE

LCOE/

Minimum bid level

Project specific factors

Investment costs, planning processes, etc.

Natural potential

Solar radiation, available sites, etc.

Economic and energy-economical conditions

Market prices and values, interest rates, etc.

Regulatory conditions

Auction design elements, Location-specific conditions: taxes, planning regulation, site restrictions, etc.


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Conditions that influence LCOE


LCOE/

Minimum bid level

Project specific factors

Investment costs, planning processes, etc.

Natural potential

Solar radiation, available sites, etc.

Economic and energy-economical conditions

Market prices and values, inflation, interest rates, etc.

Regulatory conditions

Auction design elements, Location conditions: taxes, planning regulation, site restrictions, etc.

Different regulatory conditions can lead to distortive effects.

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Levelling the playing field for auction bidders

Do regulatory conditions have to be aligned to ensure an efficient allocation of support payments?

> No general answer

> Detailed analysis of the relevance of distortive effects required, e.g. through cash-flow model:

> Pragmatic approach towards creating a level playing field:

– Not all differences lead to (strong) distortive effects

– Not all regulations can be harmonised in the short term


e.g. 1% higher business tax = 0,05% higher LCOE

Inte

rest

rate

Investm

ent

costs

Busin

ess

tax

Full

load

hours

Stronginfluence

Lowinfluence

Stronginfluence

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2. Differing preferences regarding support systems


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Differing national preferences

Issue of aligning rules:

> National regulations are tailored to national policy goals and market

conditions.

> Cooperating countries need to develop an understanding of how much

they want to deviate from the national regulations / auction design to level

the playing field for bidders.

> Necessary degree of adapting or even alignment of regulation depends

on:

– Distortive effect

– Whether or not it is part of:

● auction design, or

● location-specific conditions defined outside of the auction

– The model of cooperation:

● Mutual opening

● Joint auctions


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Adapting the rules


Mutually-opened auctions

Joint auctions

Auction Design Element

Member States may draft auction designs

individually(partial aligment)

Single auction design required

Local Specific Condition

Rules and conditions of the country apply in which the installation is to be implemented

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Mutually-opened auctions – deviations from

national design only partly necessary

Joint auctions – require alignment

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Auction design elements of pilot cross-border auctions


Design element German auction Danish auction

Volume 50 MW 20 MW (only 2,4 MW opened)

Bid size 10 MW 2,4 MW

Market premium Floating premium based on local market value

Fixed premium

Guarantees of origin

Not allowed Allowed

Self-consumption Excluded Excluded

Material Pre-qualification

None(location specified)


Financial Pre-qualification

70 €/kW 24 €/kW

Transferability Restricted Not possible

Member States draft auction designs individually, deviations

from national design only partly necessary

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Location-specific conditions of pilot cross-border auctions


Location-specificconditions

Bidders from Germany Bidders from Denmark

Permitted sites German site restrictions (only ground-mounted) for all bidders

Danish site restrictions for all bidders

Exception: roof-top PV excluded for DE-supported projects

Compensation during curtailment

Yes Yes

Remunerationduring negative prices

Yes, 6 h-rule applies to all bidders in German auction

No remuneration for all bidders in Danish auction

Rules and conditions of the country apply in which the

installation is to be implemented

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Alignment of design elements in case of a joint auction


Designelement

German auction Danish auction

Volume 50 MW 20 MW (only 2,4 MW opened)

Bid size 10 MW 2,4 MW

Market premium Floating premium based on local market value

Fixed premium

Guarantees of origin

Not allowed Allowed

Self-consumption Excluded Excluded

Material Pre-qualification



Financial Pre-qualification

70 €/kW 24 €/kW

Transferability Restricted No possible

Cooperating countries need to agree on a single auction design

in order to avoid distortive effects

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Alignment of location conditions in case of a joint auction


Location-specificconditions

Bidders from Germany Bidders from Denmark

Permitted sites German site restrictions (only ground-mounted)

Danish site restrictions for all bidders

Exception: roof-top PV excluded for DE-supported projects

Compensation during curtailment

Yes Yes

Remunerationduring negative prices

Yes, 6 h-rule No remuneration

Rules and conditions of the country apply in which the

installation is to be implemented

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IV. Conclusions


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Conclusions – I

Gains from cooperation:

> Cooperation bears a lot of potential to reduce support expenditures

> Win-win: cooperation gains must be visible for all partners

Setting the rules:

> Setting up cross-border auctions requires looking into the details

> Pragmatic approach: no perfect level playing field, no perfect allocation of

costs and benefits

> Trade off: efficiency gains versus political acceptability


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Conclusions – II

Varying intensity of cooperation:

> Necessity to align the rules depends on the model of cross-border auctions

> Choice of model allows for custom-made solutions

Cooperation is easier to implement when:

> Countries have similar power systems and energy policies, especially for

renewables support

> Countries are neighbours (direct interconnection)

“Regional” cooperation is easier to implement than “EU”-wide cooperation,

or cooperation between dissimilar countries.


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Thank you!

> For further information or in case of questions, please contact us:

Felix von Blücher Malte Gephart Corinna Klessmann

[email protected] [email protected] [email protected]

38 15/09/2016 Felix von Blücher

mailto:[email protected]

