The risk behind Germany's wind auctions

Have you got a pencil and paper? Yes, a pen will do. Now make a note of this number: 2.8GW. It is going to be significant.

Next month, Germany is set to overhaul how it procures wind power. It will ditch feed-in tariffs set by central government and move to competitive auctions. It is looking to award support for 2.8GW support of onshore wind projects via auctions next year, starting in mid-2017; and 1.6GW in an offshore auction on 1 March.

The idea is to drive down the cost of wind power and curtail subsidy payments. This makes sense. It is the right approach, we support it – and it could be a huge failure.

Here is why. Competitive auctions have the potential to drive companies across the supply chain to be more efficient. They help to drive down the levelised cost of wind energy, which is crucial if the sector is to keep enjoying support from politicians and the public, and therefore keep growing. That is good and necessary.

The drive for efficiency will open up business opportunities for inventive manufacturers and development partners. It will put some firms under pressure too but, hey, that’s the way of the world. Wind is a business, so we can have little complaint about that either.

The problem here is that Germany has operated a similar system for solar over the last two years and it has caused disruption that has undermined a once-booming sector.

More than 7GW of solar capacity was added to the German system in 2012, 3GW in 2013 and 2GW in 2014. This shows German solar was on a downward trend before the new rules came into force in 2015. However, since then, things have got even worse.

Of the 300MW of solar capacity tendered in the first two auctions in April and August 2015, only 26% of that had been commissioned by the middle of July 2016. The proportion of finished schemes will be higher now, but it does not hide the problems with the system.

We see the makings of these issues in some figures that initially look impressive. In the first of the six auctions held so far, Germany tendered new solar schemes at an average price of €91.70/MWh. This fell to €72.30/MWh in the fifth auction, in August 2016, and then again to €69/MWh in the sixth auction that completed last month. The German government is achieving its intended cuts.

But it comes at a cost. These cuts have forced developers to be competitive, but the system rewards those who have bid most aggressively. Some of those winning bidders are now finding it hard to complete their projects, which is leading to shortfalls in the amount of solar capacity that is actually commissioned.

Those are some of the key issues that have come up in the first two years of solar auctions, which was meant to be a ‘pilot’ project. But we see little evidence that they have been addressed, or that they have forced the government to change its approach. What is the point of a pilot that shows up problems that then go unaddressed?

The other element for wind developers to be aware of is the high number of losing bids – between 62% and 81% in the solar auction rounds – which means that there is a big risk that developers and investors will spend time and money entering the auction process before coming away with nothing to show for it.

The principle of the auctions is right, but there is a serious risk that Germany could fall well short of the target 2.8GW. We hope we are wrong and believe in the professionalism of German wind firms.

Even so, the sometimes frenzied nature of these auctions will mean some companies end up being hit by ‘bid fever’ and end up winning the auction at prices they will struggle to deliver.

In that case even the auction winners can end up as losers.