The goal of market competition
A recent IZES study discusses specific energy policy models Germany could adopt if it discontinued feed-in tariffs as proposed by 2017. To see what policy design is best, we first have to define the goals. Craig Morris investigates.
Germany is to switch from feed-in tariffs to reverse auctions (see my previous post). The IZES study lists three ways in which auctions are held to be better than feed-in tariffs:
- they keep costs down because the lowest bidder gets the contract;
- targets are limits – the market stops when the target is met; and
- lobby groups for renewables do not have as much influence.
Interestingly, two of those three “benefits” are actually designed to keep the transition to renewables from moving too quickly! Furthermore, those three benefits are not exhaustive; an equally important issue is competition between large corporations and SMEs (not to mention citizens and energy cooperatives); the study calls this goal “diversity among providers.” Corporations have the expertise and resources (both human and financial) to place bids, while smaller entities do not, so auctions could lead to an oligopoly by shutting out small competitors from the outset.
The study puts it this way:
“The Energiewende is more than a mere accounting balance of income and expenditures. It is a societal project for the future requiring a large number of people to take part. People therefore have to be able to and want to take part in its success.”
In placing a bid for a 100-250 kilowatt PV array in France, for instance, the study found that a firm needs “several weeks,” so each bid entails sunk costs – auctions thus potentially produce more losers than winners, and even the firms that win have to include such costs and risks in their bids. The smaller the firm, the less likely it is to even bother to bid.
In Germany, normal citizens and energy co-ops accounted for nearly half of the installed capacity in renewables and a third of the capital invested as of 2012. A switch to reverse auctions would therefore gradually revert ownership back to conventional utilities.
The example of wind power is illustrative. As I recently pointed out (PDF), the American Wind Energy Association provides a list (to paying members) of wind farms including an indication of the owner, which is almost always a single firm – but no such figures are even available in Germany, where ownership is splintered across numerous small investors. (German wind farms are listed by postal code.) Based on data for projects, IZES estimates from 2011-2012 that the average wind farm in Germany has fewer than five turbines with a total of less than 10 megawatts.
At a target of 2.5 GW for onshore wind and an average project size in Germany of 10 MW, Germany would therefore need to have 250 rounds of bidding, roughly one per business day – or, more likely, multiple projects in different locations would be included in collective rounds of bidding.
Of course, small projects below 3 MW or three wind turbines are to be exempt from having to take part in auctions. But wind turbines in particular continue to get bigger. As this comparison shows, the bidding process is likely to fundamentally change the German onshore wind power market; clearly, feed-in tariffs bring about a market that looks much different than the one resulting from auctions. Despite the small size of the average German wind farm, even these projects would be awarded in a bidding process.