scaling up renewable energy (sure) webinar: designing

SCALING UP RENEWABLE ENERGY (SURE)Webinar: Designing Power System-Friendly Auctions

March 10, 2021

Sarah Lawson – USAID

Fabian Wigand – Guidehouse

Ana Amazo – Guidehouse

Bastian Lotz - Guidehouse

Scaling Up Renewable Energy (SURE) Goals

Strategic Energy

Planning

Circular Economy of

RE

Grid Integration

of RE

RE Innovation

Fund

Competitive Procurement

of RE

Integrate emerging considerations into traditional planning processes to improve power sector performance

Procure clean energy at competitive prices and promote private investment

Systematically address grid integration issues to avoid costly curtailment of renewables and other sources

Support the transition toward a more circular economy for renewable energy

Harness open innovation and partnering approaches

Agenda

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1. System-friendly renewable energy auction design

✔How to procure RE that is produced when and where it is needed, including the use of utility-scale batteries?

2. Technology selection in auction design

✔How to enable RE technologies to compete with one another and possibly thermal generation?

3. Auctions and market integration

✔How to promote the integration of RE into electricity markets?

4. Q&A

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Today’s Webinar• 45-minute presentation followed by a 15-minute Q&A

• Presentation will be recorded and available on https://www.usaid.gov/energy/auctions/training

https://www.usaid.gov/energy/auctions/training

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USAID Renewable Energy Auction Toolkit

One-stop-shop for current best practices in auction policies, innovations, and market trends developed under the global Scaling Up Renewable Energy (SURE) program, which draws on USAID’s experience supporting auctions globally.

Sample tenders and Power Purchase Agreements

Examples of local policies, laws, and regulations

Available online beginning July 2020

Trainings and webinar recordings

Reports, white papers, and guides

Upcoming technical webinar series on auction design and implementation

https://www.usaid.gov/energy/auctions

USAID RENEWABLE ENERGY AUCTION WEBINAR SERIES | DESIGNING AUCTIONS


Speakers

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Sarah LawsonSenior Energy Analyst

USAID

Fabian WigandAssociate Director

Guidehouse

Ana AmazoManaging Consultant

Guidehouse

Bastian LotzSenior Consultant

Guidehouse

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Auction design responds to countries’ evolving policy objectives and observed auction results

Trend 4: Promoting market diversification

Trend 3: Promoting market integration

Trend 2: Addressing system integration

Trend1: Transition from negotiated procurement to auctions

• Increase competition in procurement

• Test investor interest and risk allocation approaches

• Improving value of energy to the power system

• “Power characteristics” instead of single RE technologies specified

• Direct sales into wholesale markets with feed-in premium

• Commercial and industrial consumprocuring power directly

ers

Overview of auction design trends

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3. System-friendly renewable energy auction design

How to procure RE that is produced when and where it is needed, including the use of utility-scale batteries?

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At higher shares, VRE changes power systems’ supply adequacy, balancing requirements & grid infrastructure needs

Summer

Germany – Jul. 6-13, 2020

Winter

Germany – Jan. 6-13, 2020

Sources: Agora Energiewende 2020, Greening the Grid 2015, DUH 2011/German Federal Ministry of Economic Affairs and Energy

Larger geographic area- Lower intermittency (200 turbines)

Smaller geographic area - Higher intermittency (15 turbines)

Output wind turbine (NREL) Germany – Illustration of grid bottlenecks

VRE: Variable renewable energyNREL: National Renewable Energy Laboratory

Timing: Temporal mismatch of VRE generation and demand

pattern

Quality: Intermittency of VRE generation

Location: Spatial mismatch of VRE generation and

demand centers

Supply adequacy Balancing requirements Grid infrastructure needs

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Time-based incentives support the match between the timing of variable RE generation and power demand

Timing: Temporal mismatch of VRE generation and demand patternSupply adequacy

Designs solution: Time-based incentives and penalties

Design solution: Time-based incentives and penalties

• Price adjustment factors reward generation at specific times of the day or year.

• Supply blocks require producers to guarantee supply during certain periods or otherwise face penalties.

Country experiences

• Mexico: Time-of-day adjustment• Abu Dhabi: Time-of-year adjustment• Chile: Supply blocks

Design solution: Time-based incentives

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Chile’s supply blocks enable continuous supply from different types of RE

Sources: ACERA 2017

Objective Allowing intermittent technologies to optimize their feed-in potential and guarantee supply to distribution companies.

Country experience: Time-based incentives

Design: - Distribution companies provide demand projection- Regulator aggregates projected supply requirements, conducts auction- Bidders bid for one or several blocks representing projected (not real-time) demand- Production deviations settled at spot-market prices

Result:- Continuous power supply successfully contracted – all from new RE- In 2017, contracted price of $3.25ct/kWh lower than spot market prices of $5.5ct/kWh

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Virtual hybrids enable greater dispatchability of VRE generation

Virtual hybrids (supply-side aggregators / multi-location of plants):Several generation assets connected at different grid connection points

Country experience

Germany – Next Kraftwerke Virtual Power Plants (supply and demand-side aggregators)


Balancing requirements


Suitability

• Shifting of VRE supply to cover peak demand periods.

• Dispatchability and spatial smoothing effects add flexibility

Design solution: Virtual hybrids

VRE: Variable renewable energy

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Physical hybrids reduce intermittency of VRE; combined with storage, allow better load following


Balancing requirements


Suitability

• Offsetting technology-specific intermittencies of VRE

• More efficient utilization of land and transmission capacity

Design solution: Physical hybrids

Physical hybrids (co-location of plants):Several generation assets connected at one grid connection point

VRE: Variable renewable energy

Country experience- Solar-wind auctions in India- RE + storage auctions in India, Hawaii, Australia, Israel

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In most geographies, auctions only recently started to include incentives for BESS

Location Objective Technology Remuneration Award criteria

India Deliver energy during peak hours

Variable RE + storage

Peak and off-peak tariff for generation ($/MWh)

Price-only: Lowest peak tariff offered (off-peak is pre-defined)

Hawaii Reduce variable RE curtailment

Solar PV + BESS

Lump sump payment for availability ($/MW) + energy component ($/MWh)

Price and technical ranking, followed by best final offer

Portugal Increase system flexibility, defer grid upgrade

Solar PV + BESS

Revenue (wholesale market + corporate PPAs + ancillary services market) minus fixed compensation to the system

Price-only: Bids with highest contribution to Portuguese system (based on bid’s net present value)

Source: Maurer et al. 2020, Hawaii Electric 2019, PV Magazine 2020

Country experiences: Physical hybrids – variable RE + BESS

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India’s auctions aim for the procurement of more firm and dispatchable RE

Country experience : Physical hybrids in India

VRE: variable renewable energyCUF: Capacity utilization factor, refers to the ratio of a plant’s actual output over a year to the maximum possible output under ideal conditions

*Exchange rate: 1 USD equals 73 Indian Rupees. Source Oanda, February 5, 2021Sources: MERCOM India 2018, 2019, Anurag Mishra (USAID) 2020.

Wind and solar hybrid2018: 840 MW2019: 720 MW

RE + storage for peak supply2020: 1200 MW

• Objective: reduce intermittency of VRE, improve utilization of grid and land capacities

• Supply obligation: min. annual Capacity Utilization Factor of 30%

• Objective: dispatchable power• Two-part tariff: off-peak tariff fixed at ~3.94 ct/kWh, auction-

determined peak tariff• Supply obligation: min. annual Capacity Utilization Factor of 35%• 900 MW with pumped storage & 300 MW with BESS awarded

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Location-based incentives aim at closing the gap between VRE and grid infrastructure development

Location: Spatial mismatch between VRE generation and demand centersGrid infrastructure needs

Integration of variable renewable energy spans a variety of measures⮚ Grid integration⮚ Strategic energy

planning⮚ Demand-side

integration⮚ Market integration

Procurement via auctions

Country experiences: Location-based incentives

Design solution: Location-based incentives

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3. Technology selection in auction design

How to enable RE technologies to compete with one another and possibly thermal generation?

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Converging technology costs and policy objectives motivate countries to move towards stronger technology competition

Source: Bloomberg New Energy Finance

Global solar PV and onshore wind LCOEs are converging.

Countries around the world implement technology differentiation in their auctions for various objectives.

Some countries have adopted technology-neutral auctions.

Designing fully technology-neutral auctions is complex since project development cycles for technologies differ.

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If various technologies compete, additional policy considerations arise

If various technologies compete, this

minimizes generation costs of procured energy

ensures compliance with applicable regulation demanding no technology discrimination

XX

creating RE technology diversification to achieve emission reduction targets (if conventional and RE power sources compete against each other)

avoiding an overcompensation / windfall profits of cheaper technologies

minimizing total system costs by preselecting technologies with different generation profiles & ensuring deployment in certain regions

Especially in less mature markets, a certain degree of technology-differentiation in auctions is advisable to account for additional objectives.

But other policy objectives may not be reflected, such as

X

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Qualification requirements and winner selection criteria enable the reflection of additional policy objectives

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Country examples

• Technology maturity: U.K.• Generation profile:

California, Chile• CO2 emissions: Colombia

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Country examples

Technology-specific price ceilings: Netherlands, UK

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How to reduce overcompensation of cheaper technologies intechnology-neutral designs?

Winner selection criteria: Impose technology-specific ceiling prices*

Country examples

Technology-specific price ceilings in multi-technology RE auctions in the Netherlands and United Kingdom

Single ceiling price Technology-specific ceiling prices

* in pay-as-bid auctions

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How to reduce overcompensation of cheaper technologies in technology-neutral designs?

Qualification requirements: Implement different technology bands

Auction without technology bands

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How to reduce overcompensation of cheaper technologies in technology-neutral designs?

Qualification requirements: Implement different technology bands

Country example

United Kingdom:- Group 1 (established

technologies):, e.g., onshore wind, solar, waste energy with CHP, small hydro.

- Group 2 (less established technologies), e.g., offshore wind, biomass CHP, wave, geothermal.

Auction with technology bands

Technical qualification requirements

on bidders for providing firm energy or supplying during certain times

Supply commitments

requiring bidders to supply a specific amount of electricity during certain times of the year and/or day

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How to address system integration costs in technology-neutral designs?

Country example

India: Annual minimum generation requirements (capacity utilization factor)

Thailand: Peak (98%) and off-peak (66.3%) minimum generation requirements

Country example

Chile: Supply commitments for hourly and seasonal time blocks

Qualification requirements

Time-of-day/-year price adjustment factors

accounting for the system value of specific technologies procured in the auction

Quotas or bonuses for system-friendly technologies / geographic locations*

accounting for grid constraints for specific locations and impacting technology selection

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How to address system integration costs in technology-neutral designs?

Country example

California: Fixed price ($/MWh), adjusted by time-of-day factors to reward generation at times of peak demand

India: Flat off-peak tariff & bid on peak tariff.

Country example

Mexico: Regional adjustments of bid prices (adjustment factors per zone)

Germany: Maximum capacity quota in the north and bonus/malus at distribution level

* impacting selection of technologies in case of regional resource differences

Winner selection criteria

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3. Auctions and market integration

How to promote the integration of RE into electricity markets?

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Countries with or introducing a wholesale power market may consider a transition from fixed tariffs to premiums

Auctions can award different types of premium payments:

Fixed premium: Premium set at a constant level independent of market revenues

One-sided sliding premium: Premium varies depending on market revenue (w/o payback if market price > strike price).

Double-sided premium: Premium varies depending on market revenue (with payback if market price > strike price).

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Choice of premium depends on market maturity and policy preference for market risk allocation

Advantages

High market integration incentive.

Planning certainty through guaranteed revenue floor.Market integration incentive, but lower than fixed FIP.

High planning certainty for investors as level of revenue is constant.

Disadvantages

Low planning certainty for investors as exposure to long-term market price risk, higher risk of winner’s curse.

Lower certainty of remuneration costs than double-sided FIP.

Low market integration incentive with hourly time interval.

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Developers may split contracts into long-term PPAs and merchant components

• Auctions may allow bidders to only supply part of their energy production at the awarded PPA tariff, e.g., through

– Minimum supply obligations for energy delivered at awarded PPA price

– Auction volumes defined in generation volume, whereby bidders only bid on a certain share of their max. generation potential

• Project developers can market potential excess volumes through other revenue options (e.g., wholesale market, commercial PPAs, ancillary services market)

Country example

Philippines (planned): Energy generation beyond energy volume awarded in the auction can be sold at wholesale market.

India: Minimum generation requirement (Capacity Utilization Factor).

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Summary

Countries gradually incorporate system-friendly design solutions such as time-based incentives, location-based incentives and hybrids to maintain system reliability with high RE levels.

Auctions recently started to include incentives for BESS due to falling technology costs, but how much BESS is appropriate depends on system-specific characteristics (demand and VRE feed-in profile, interconnection with neighboring power systems, flexibility of demand and generation sources).

Technology-neutral designs tend to minimize generation costs of procured energy and allow for compliance with regulations requiring technology neutrality, but disregard inherent technology differences and may fail to provide technology diversification.

Auctions implementing a certain degree of technology differentiation are better suited to achieve additional goals such as avoiding windfall profits for cheaper technologies and accounting for RE system integration considerations.

In countries with or introducing a wholesale power market, premium schemes increase wholesale market liquidity and integration of VRE generation while hedging market price risk.

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Thank you! Please visit and share the Renewable Energy Auctions Toolkit: https://www.usaid.gov/energy/auctions

Recording of this webinar will be posted on the Training page:




scaling up renewable energy (sure) webinar: designing

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