Auctions – Legislative Advantages for Investors

04.04.24

As renewable energy markets mature and equipment costs decline, many countries are transitioning to renewable energy support methods that introduce more competition among participants. One of these methods is so-called “green” auctions.

Auctions are a flexible mechanism that can be organized and adapted to the needs of the power system at a particular time. Quotas can be distributed by region, stimulating the development of renewable energy where it is lacking, or regulating the distribution of power from different technologies (solar, wind, bioenergy) within the overall quota. This gives the state the opportunity to respond to changing conditions in the operation of the energy system, planning its development more qualitatively.

Typical implementation of this mechanism:

The state announces the total capacity of new facilities that should be offered to companies that want to invest in renewable energy projects. Sometimes this quota has a distribution by technology or region. Companies submit auction bids, which include the capacity of future facilities and the price at which they are willing to sell electricity to the state. The relevant state bodies evaluate these proposals based on the proposed price and other criteria. Auction winners are recognized as participants who offered the lowest price for electricity (auction price), at which they are ready to produce and sell it to the power system, and also meet other selection criteria. Auction winners are eligible for state support and sign long-term power purchase agreements with the state (usually for 15-20 years).

In Ukraine:

In 2019-2020, legislative changes were adopted in Ukraine regarding the functioning of the renewable energy market. According to the new legislation, for new solar generation facilities over 1 MW and wind generation facilities over 5 MW, instead of the “green” tariff, auction prices for generated electricity are introduced. Other types of renewable energy (small hydropower plants, bioenergy) remain in the “green” tariff system, but in the future they may participate in auctions. At the same time, the law establishes that the highest auction price cannot be higher than the current “green” tariff. This ensures a mandatory reduction in the price of “green” energy in the future.

The auction winner for solar power plants undertakes to build and put the facility into operation within two years, and for other renewable energy facilities – within three years in case of winning the auction. After the completion of the construction of the renewable energy facility, the investor receives a state-guaranteed purchase of electricity at the auction price for 20 years in advance, pegged to the euro. Therefore, for investors who want to enter the “green” energy market, it is important to calculate the project’s economics with the current “green” tariff, and then decide how much it is acceptable to lower the price, taking into account their estimates of the project’s profitability and payback period.

The new legislation gives the investor two undeniable advantages.

First advantage: The term of the state-guaranteed purchase of electricity will be 20 years. This is 10 years longer than the term of the “green” tariff, which is valid until 2030.

Second advantage: The investor receives state guarantees for the purchase of electricity at the auction price before the start of construction of the facility that claims state support, and not as in the case of obtaining the “green” tariff – after the construction of the facility.

For investors to participate in auctions, it is mandatory to provide:

–   An irrevocable bank guarantee provided in favor of the guaranteed buyer. The amount of the bank guarantee is 5 euros for 1 kilowatt of the capacity of the facility that claims state support;

–   Copies of the contract for connecting the facility to the electricity grid;

–   Copies of documents certifying the right of ownership or use of the land plot.

 

For investors, the auction model of project implementation provides several important advantages:

  • Fixed auction price for “green” electricity for 20 years in advance from the moment the facility is put into operation. This period is enough not only to return the investment, but also to receive income. At the same time, it is worth noting that the “green” tariff is valid only until 2030.
  • The auction winner receives a guarantee of support from the state in the form of an auction price until the construction of the renewable energy facility. The current system of “green” tariffs provides for receiving such support after the construction of the renewable energy facility, i.e. after the investment. Often, in the event of improper paperwork and adherence to procedures, investors cannot receive the “green” tariff even after the construction of the renewable energy facility.
  • Guaranteed purchase from auction winners of the entire volume of released electricity at the auction price. Even if such a price as a result of the auction is lower than the “green” tariff, already in the medium term, the fixed current auction price will become higher than future “green” tariffs, which are decreasing every year for new renewable energy facilities.

In late 2020, the Ministry of Energy presented a draft of quotas for supporting the production of electricity from renewable sources, a schedule of auctions for 2021 and indicative forecast indicators of annual quotas for support in 2022-2025. Details of the proposal are available on the Ministry of Energy website.

In which projects can the mechanism be applied?

  • Commercial solar power plants (SPP)
  • Biogas plants
  • Geothermal energy
  • Commercial wind farms (WPP)
  • Biomass plants