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Auctions steam ahead

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Auctions steam ahead

18th August 2017

By: Terence Creamer
Creamer Media Editor

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South Africa may be on the global sidelines currently with regard to the procurement of new renewable generation capacity, chiefly because of Eskom’s refusal to enter into new power purchase agreements. Nevertheless, as a relatively early adopter (some might even say pioneer) of the auction methodology to procure renewables, it is interesting to discover how the instrument is being used globally and to what effect.

A recent report by the International Renewable Energy Agency (Irena) points to the continued rise of auctions as the preferred renewable-energy procurement tool, with the analysis showing a continued expansion in the use of the instrument in 2016, when auctions outpaced both feed-in tariffs and quotas.

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This rising use of auctions is attributed largely to the increasing maturity of technologies being procured, namely onshore wind and solar photovoltaic (PV). However, Irena says there is also “no doubt” that auctions have improved price competitiveness. In 2010, solar PV was contracted at a global average price of almost $250/MWh, compared with an average price of only $50/MWh in 2016. Wind prices, meanwhile, have also fallen, albeit at a slower pace, owing to the fact that the technology was more mature in 2010. The average 2016 contracted price of $40/MWh for onshore wind is about half that achieved in 2010.

While South Africa’s auction programme stalled last year, this was certainty not the case globally, with Argentina, Canada, Mexico and Zambia all kicking off auction-based programmes in 2016. In addition, auctions were used even for less mature renewables technologies: Denmark and the Netherlands held auctions for renewables such as offshore wind, while biogas capacity auctions were held in Argentina and Peru. Dubai, in the United Arab Emirates (UAE), also announced an auction for solar thermal power.

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Irena reports that several price records were also set last year, including in Chile and the UAE for solar PV, in Morocco for onshore wind and in Denmark for offshore wind. “In countries such as Chile and Mexico, renewables were more competitive than conventional energy technologies and won a large share of contracts at record- breaking prices.”

Irena believes the “virtuous cycle” of falling equipment costs, improved technology, optimised supply chains and increased competition is likely to continue driving price reductions in the coming years.

What does this mean for South Africa, however? For one, it indicates that, despite the high prices contracted during the first two bid windows, the auction model remains relevant. Since then, prices have fallen sharply, indicating that the auction model is supportive of lowering prices and should, thus, be sustained once the impasse is overcome.

Secondly, the growing cost competitiveness of renewables globally and locally cannot be ignored by policymakers. Already the solar PV and onshore wind prices bid during South Africa’s fourth bid window have been calculated to be around 40% lower than those bid for new baseload coal. Such a reality has serious implications for the future gene- ration mix – a reality that surely also needs to be fully reflected in the next Integrated Resource Plan.

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