Germany’s Renewable Energy Auction Model Is Not An Absolute Disaster

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Originally published on Lenz Blog.

Corinna Klessmann and Silvana Tiedemann are even calling it a success.

These authors are employed as specialists in the field by the Ecofys consultancy firm, and have advised the German government on these issues. So I assume they know what they are talking about.

In contrast, the last time I wrote about the auction model (last December) under the title “Auction Model Failure” I called it a “complete disaster”.

That was in reaction to reports by Hans-Josef Fell which said that at the time only one third of the projects that won auctions were actually realized.

Now it turns out that an amazing 100% of projects in the first auction was realized, which leads Klessmann and Tiedemann to celebrate a “success” of the model.

Wait a moment.

“Success” was when Germany installed close to 7 GW a year under a feed-in tariff. 100 percent of the first auction round of 150 MW is still an anemic 2.14% of that record. Meanwhile, investment in Germany in renewable energy is down another 15% in 2016 compared to 2015, after dropping a whopping 46% in 2015 compared to 2014, the most miserable failure of any country on the planet.

Maybe realizing 100% of an 150 MW auction volume is not quite reason for celebration under these circumstances.

The problem with auctions is that contrary to what they are sold as (more market-based model) they are removing the decision on how much new solar is built from the market to the state. There is no way in an auction system to build even one MW more than is auctioned in the first place.

I have a problem with that. Germany has a nice track record, especially with solar. But the last couple of years have seen so low results that we now even need to worry if the 2020 EU Directive goal of 18 percent renewable share will be reached. Germany is projected to be one of only five EU Member States to fail their target.How embarrassing is that? Apart from being illegal, since it would violate the Directive? The last German solar panel maker just went into bankruptcy. The European share of solar installations has dropped to only 8 percent, leaving this promising industry to the Chinese.

But wait, the auctions also showed very low prices. The authors write:

There is no doubt about it: auctions have been successful in driving down costs. Within less than two years, the prices for solar PV fell by almost 40% from 9.2 to 5.7 cts/kWh. Auctions turn out to be faster and more flexible than administrative procedures  in adjusting support levels to cost reductions. In the past, even a built-in automatic adjustment mechanism was not always sufficient to avoid high costs for consumers.

Of course there is doubt about it. The auction model only works to increase costs. They introduce new risks for operators. Risk of failing to secure a bid, risk of failing to realize the project and having to pay sanctions, risk of not knowing what they will get paid until the auction is finished. All those risks naturally increase the interest the operator needs to pay, since interest is based on risk assessments. And the main part of solar projects are the fixed cost of buying and installing the equipment. That means the level of interest has a very large influence on cost.

While it is true that prices went down, that does in no  way mean the reduction was caused by Germany switching to auctions. Germany is now a very small player on the world market. Even Europe as a whole is down to an 8 percent market share. So how is that change to auctions supposed to have any influence on solar prices?

The days where German policy influenced solar prices are over. The feed-in tariff made mass production possible. That lead to massive price reductions. The auction model in contrast reduces the size of the market compared to the 7 GW a year good years. If anything, that reduces the speed with which solar costs go down.

To sum up, yes, the first auction volume was realized 100 percent. That’s better than the alternative, which was a rate of only one third reported in 2016. So we barely avoided that the move to auctions resulted in an absolutely catastrophic disaster.

That’s not “success”, but it’s what has to pass for good news in recent German policy.

Reprinted with permission.