Renewables auctions in many European countries need updating to deal with the new realities. Here we look at the EU’s plans for reform.
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Key takeaways
To boost the struggling wind sector and deal with renewables’ growth in general, the EU is preparing to introduce three notable reforms.
First, bringing in inflation indexation as a standard feature of renewables auctions. This will start with wind power auctions, as this is where rising supply chain costs are having the most immediate impact. The Commission may start with non-binding recommendations, to then be superseded by legislation.
Second, a crackdown on non-viable or heavily delayed projects taking up space in grid connection queues. Over time, this should improve the quality of projects from the outset and dissuade less plausible projects from joining renewables auctions in the first place. The penalties may also be written into the conditions for joining the auction process.
Third, greater use of non-price criteria in auctions. The EU wants to move away from a pure focus on price and give greater weight to other considerations like cybersecurity, supply chain diversification and climate impact. This is a key part of the upcoming Net Zero Industry Act.
Reforms for a growing energy source
The EU is planning a significant expansion of renewable energy, from around 22% today to 40-45% by 2030. State-run auctions are still the main way to allocate funding and pick projects, meaning these policies will play an increasingly important role in delivering energy supply across Europe.
Yet the tendency for renewable energy auctions to be undersubscribed has grown in recent years. Higher costs and excessively bureaucratic procedures are often blamed.
As part of this expansion, the EU is setting out reforms in a few different areas that are meant to learn from lessons from the past and from outside the EU (notably the UK). Therefore, the standard model for renewables auctions is expected to change in three ways: protection from rising costs, shortening project queues and the inclusion of non-price criteria.
Inflation indexation
The European wind power sector has become increasingly vocal about its struggles with supply chain costs and the need to allow prices to rise. We saw how serious they were when the UK’s recent offshore wind power auction failed to secure any bids due to a maximum bid price that they considered far too restrictive (£60/MWh, in 2023 prices). This has prompted the UK Government to U-turn and raise the maximum price to £100/MWh.
The European Commission has also responded to these concerns and, in its recent announcement of measures to support the industry, noted that it would include inflation indexation.
What this means is that the maximum bid price in auctions would automatically rise over time in line with inflation. This should avoid the problem of failed auctions and the need to rapidly-produce a purely reactive response to difficult conditions in the renewables sector.
Initially, the Commission is simply looking at producing non-binding recommendations for how to introduce inflation indexation, as these can be created and published relatively quickly (there’s no fixed timeline, but they could come by the end of this year). Then the expectation is that the recommendations will be incorporated into legislation (potentially as an amendment to existing legislation), taking into account feedback from national governments.
Cutting queues
If inflation indexation is a carrot for the renewables sector, then the stick will be a tightening of rules around how long projects can stay in the queue for grid connections.
With grid access scarce across Europe and demand already far outstripping supply, the Commission wants to crack down on projects that are in the queue but which have little chance of being completed on time (or at all) and are holding back projects that are moving at a better pace.
This could involve financial penalties or simple removal from the grid connection queue (as is being put forward by the UK regulator).
While the direct effect here is on the steps after the auction, the thinking is that these conditions would be built into the bidding process. The negative risks associated would also hopefully improve the quality of bids being submitted in the first place.
Non-price criteria
The introduction of non-price criteria is another important change. Traditionally, renewable energy auctions have heavily focused on price to the exclusion of all else.
This has been positive in the sense that it has successfully helped drive down prices and motivate companies to innovate and find ways to deliver renewable energy projects at a lower cost.
However, it has inevitably also given an advantage to non-EU competitors receiving financial support from their state (i.e. China).
Given that prices are now much lower than they were, there is a growing feeling that focusing so intensively on price is unnecessary. Instead, EU legislators are looking at introducing criteria like sustainability and cybersecurity into the weighting for assessing projects in renewables auctions.
Specifically, the Net Zero Industry Act establishes a 15-30% weighting for sustainability and resilience criteria.
Under the original European Commission proposal, the resilience criterion for public tenders would not be met if the offer in question gets its supply of a net zero technology from a third country that supplied more than 65% of that technology to the EU in the previous year.
The European Parliament is looking to tighten this criterion. First, by moving the threshold from 65% down to 50%. Second, applying a pre-qualification criterion excludes offers where 50% of the net zero technology (measured by financial value) comes from a third country that isn’t a party to the WTO’s Agreement on Government Procurement.
There’s a bit more caution on the side of national governments. They prefer pre-qualification criteria to weighting in the award part of the auction, but still, the end compromise (expected to come during Q1 2024) should increase the role of non-price elements.
The hope is that this reform will boost the odds of companies using European supply chains and promote general supply diversity. This should prevent wind power (currently mostly European) from suffering the same fate as solar and could help the European solar industry recover some of its lost strength.
Conclusion
With more renewables, the renewables auction system will become an increasingly key part of delivering energy production over the coming years. Noting existing problems and disadvantages with the status quo, the EU wants to implement several reforms to deliver a more attractive offer for energy companies, a more efficient system and a more resilient energy supply chain.
