1. What happened in Portugal’s recent record-breaking solar auctions?
Aurora News Brief – August 2019
What happened in Portugal’s recent record-breaking solar auctions?
Summary
The results of the Portuguese solar auction were officially announced on 7 August. At prices as low as €14.76/MWh, these results are not representative of the cost of new solar development, even in Iberia. Yet, with over 9 GW of solar expected over the next 20 years, these clearing prices could significantly undermine future investment. This is particularly important in Portugal, where the auction mechanism is currently the only way to receive a grid connection.1
Background and functioning of the Portuguese auction system
The Government has released the final results of the solar auctions held in July 2019
Applicants could bid for the allocation of public electrical grid capacity at specific sites, clustered in 24 slots which ranged from 10 to 200 MW. A total volume of 1.4 GW was auctioned
Two modalities were available for a 15-year contract:
Guaranteed remuneration: the price of the bid corresponds to a discount (expressed as a %) on the reference price set by the Government. This modality functions as a Feed-in Tariff that guarantees a fixed price (€/MWh) for the electricity generated
General remuneration: the price of the bid corresponds to a compensation value (€/MWh) to the system. Under this modality, generators are exposed to market prices or private contracts but have to pay a fee to the system for the electricity generated
The auction is won by the participants that offer the best economical result for the contracting entity (expressed in NPV terms). Participants compete for each of the slots and bid in their offers in either of the two modalities
Contract winners have 36 months to commission the project. Licenses are not transferable and a penalty of 60,000 €/MW applies in case of non-delivery
Key results from the auction
Allocated capacity - A total of 1.15 GW of solar capacity were allocated, short of the planned 1.4 GW. The majority of contracts (862 MW) were awarded under the Guaranteed remuneration modality with the General remuneration modality accounting for only 288 MW of capacity
Auction prices – Under the Guaranteed remuneration, the average clearing price of the auction resulted in €/MWh, or a 54.93% discount to the reference price, ranging from to €/MWh. Under the General remuneration modality, the average price cleared at €/MWh with a minimum contribution to the system of 5.1 €/MWh and a maximum of €/MWh
Contracts awarded under each modality, MW
862
Iberdrola
Aura Power
Power&Sol
288
Akuo
Days of Luck 29
Others
Guaranteed remuneration
General remuneration
1. Our expectation is that the Government auctions are the only effective way of securing a connection reservation title as other options require knowledge of where there is capacity in the network (which is not transparent and available capacity is scarce), or high reinforcement costs in suboptimal sections of the network
Sources: Direcção-Geral de Energia e Geologia, Aurora Energy Research
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2. What happened in Portugal’s recent record-breaking solar auctions?
Aurora News Brief – August 2019
What happened in Portugal’s recent record-breaking solar auctions?
Potential reasons for low clearing prices in the auction
The auction was oversubscribed, with 10.2 GW of offers against an auctioned volume of 1.4 GW allocated in 24 different slots. There was an average of 9 participants for each slot offered in the auction, with up to 22 participants competing for a 10 MW slot. Hence, a low clearing price was always expected. However, Aurora believes that the clearing price, particularly under the Guaranteed price modality, does not reflect the true costs of delivering a solar PV project. Potential reasons for the record-breaking prices are the following:
Strategic behaviour of developers – due to the high potential of the Portuguese market for renewables deployment, developers might be willing to accept low prices in order to secure a market share
Sunk development costs – with the expected changes to the auction regime, there has been no solar new build in the market for a couple of years. Projects that were in an advanced development stage likely considered a large portion of their development costs as sunk, substantially lowering their bids
Expectations of high prices beyond the 15-year regulated period – the contracted arrangements under the auction last for a period of 15 years. Although we would expect a heavy discount for revenues beyond this initial period, high long-term revenue expectations could have a significant impact on the auction results given that securing a contract is a requirement for grid connection
Speculative bids – although a fee of 60,000 €/MW is required for applicants in case of non-delivery, there is a risk that some projects will not deliver in the 36-month period defined in the contracts.
It is important to note that the expectations and assumptions underpinning the clearing price of the auction under the General remuneration modality might very well be very different. In this case, higher than expected market prices can provide a significant upside to the project’s IRR
Thoughts on the upcoming auctions in Portugal
The next solar energy auction will be held in January 2020 with around 700 MW of auctioned capacity
It is still unclear if the low clearing prices of this auction depict a new reality for government- backed solar projects, or particularly aggressive bidding driven by the reasons outlined above. Experience from other countries such as Brazil and some US states support the view on low prices, while others do not. The latest auctions in Spain effectively allow PV generators to benefit from wholesale market prices, with a price floor of around €/MWh. More strikingly, perhaps, the CfD auction for solar in France just cleared at over 60 €/MWh
Our analysis indicates that fixed tariffs of around €20/MWh result in IRRs between 3.5% to 4%, even under optimistic load factor and revenue assumptions post-subsidy period. This can ultimately undermine the appetite for future renewable investment, risking the likelihood of meeting the government’s aggressive RES target of over 80%
Prepared by:
Ana Barillas Pablo Borondo Lisa Pflaum
Sources: Direcção-Geral de Energia e Geologia, Aurora Energy Research
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