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13 January 2015

Carefully design tenders for renewable energy

The European Commission’s State Aid Guidelines require from 2017 that support levels for renewable energy projects are to be determined in a competitive bidding process. Agora Energiewende highlights the most important auction-design features and identifies critical issues requiring further assessment.

The new Energy and Environment State Aid Guidelines of the European Commission require as of 2017 that support for renewable energy projects generally be awarded in a competitive bidding process instead of administratively set support levels. In economic theory, calls for tenders, or auctions, are an efficient tool for determining prices in a competitive manner. However, there are various prerequisites for a successful tendering process: for example, sufficient competition must be assured (through a sufficient number of bidders). Since the tendering process brings about additional risks for project developers, the auction design needs to address these risks or else costs may increase significantly. Accordingly, a wide range of issues related to renewable energy tenders are still unresolved, including whether they can actually be used sensibly for all technologies in all European countries. Carefully assessing the available options for auction design is thus a central precondition for the cost-efficient expansion of renewable energy. A thorough analysis of market structure and competition is required before designing a specific auction design  pilot tenders should be used to enable maximum learning. Further conclusions from this background paper by Agora Energiewende are that wind onshore is the most challenging technology for auction schemes and that the continued inclusion of a variety of actors is a precondition for competition. The background paper is based on analysis of Fraunhofer ISI, Consentec and Vienna University of Technology who examined key conditions for efficient tendering procedures and reflected on international experience in this area.

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