Comparative Analysis of Competitive Procurement Mechanisms - PowerPoint Presentation

1. Comparative Analysis of Competitive Procurement MechanismsApril 2019

2. AgendaOverview on difference administratively-set FITs, bilateral deals, auctions and their applicabilityThe auction design process and design elementsSimulation to understand the problem of the winner’s curse and how it can be addressedSite-selected vs bidder-selected auctionsHow to set ceiling pricesTechnical requirements, financial guarantees and penalties to ensure project realizationConclusion

3. Feed-in tariffs provide high certainty for developers, but little volume control and price competitionRealized projectsNon realized projectsRemunerationdefined tariffAdministratively-set Feed-in tariffGovernment sets price (experts) Market determines volume (projects)Projects can be built until volume/budget cap is reachedFeed-in TariffPolicy goals+ Secure revenue streams help less mature technologies and small project - Slow in reacting to market price changes, less competitive pressure- Low volume control Market maturity+ Not much market maturity, competition and RE market knowledge requiredInstitutional capacityo Experts to calculate and regularly update tariff, but procurement easier and flexible

4. Bilateral deals suitable for less mature markets, but are less scalable and transparentRemunerationDefined volumeCapacity (kW), production (kWh), budget, grid capacityPreferred bidQualified, non-preferred bidderABCofferedpriceBilateral dealGovernment sets volumeBidders offer price Negotiation determines price/changes in sizeBilateral dealPolicy goals+ Volume control and higher flexibility to tailor projects than auction+ Competitive price building mechanism but lower than auction- Limited transparency- Risk of delayed realization due to negotiation stageMarket maturityo Competition needed but less than in auction- Difficult to scale if many biddersInstitutional capacity- Require capabilities for negotiations, but more flexible on timeline

5. Auctions provide strong volume control, price pressure and scalability, but need competitionAuctionsGovernment sets volumeMarket sets the price (clearing at price level where auction volume is met)Price (pay-as bid or clearing)Defined volumeCapacity (kW), production (kWh), budget, grid capacityAwarded bidsNon awarded bidsRemunerationAuctionsPolicy goals+ Volume control+ Competitive price building high+ Fast realization after award- Developers face risk of not being awarded and sunk costMarket maturity+ Easy to scale- Need high competition- RE producers need to know market to place bidInstitutional capacity- Require stronger institutional capabilities to build bidder interest

6. Focus on auctions: overview of auction design...Target definitionMarket & regulatory analysisAuction designImple-mentationEvaluationInstitutional set-upWhat is auctionedProcurement procedureConditions for participationEnforcement of obligationRights for awarded projectsPolicy goals Market sizePre-developed projectMarket playersTechnology costProject development & operationExisting regulations & incentives Drafting of required documentsMarket buildingProcurement conductionRfQRfP and awarding of bidsContracting Monitoring of realizationLessons learnedAdjustment of procurement design

7. Overview of different design elements and functionsWhat is auctionedTechnology type, technology size, auctioned item (kWh, KW, budget), multi vs. single-item auctionAuction ProcedureStatic vs. dynamic auctions, price, selection criteria, pricing rule, number of roundsConditions for participationTiming of the auction, technical requirements, financial bid bondsEnforcement of obligationsDeadlines and penaltiesInstitutionsAuction regulation, design, implementation, contract off-takerRights for awarded projects Provisions against off-taker, political and currency risk

8. Simulation – the winner‘s curseProcurement auction for similar projectThe bidder has difficulty in estimating his costs (symbolized by a can with cash). Each bidder estimates the amount of the cash in the can and notes it on a piece of paper. Cover the piece of paper.Static sealed bid auction – all bidders hand in their bids at the same time Each bidder decides on a bid price and writes it on a piece of paper. Announcement and evaluation of the resultsBased on Takon by Ehrhart, 2016

9. Introduction to the problem of the winner‘s curseDefinitionAuction bid price is less than the actual value of the good, which will result in a loss for the auction winnerExampleExcessive yield or underestimated costsImpact on biddersOften bidders tend to estimate the costs relatively wellIf bidders are guided by their cost estimates in their bid strategy, the bidder who underestimates costs wins the auctionAdequate bidding behaviorUpward adjustment of the cost estimation in case of having a winning bidAdjustment of the bid where possibleBased on Takon by Ehrhart, 2016

10. Site selection and preparation: benefits and challengesGovernment-site auctionBidder-site auctionBidder 1Bidder 2Bidder 3Bidder 4AuctioneerProject siteSelected & pre-developed15 MW30 MWProcured volume (e.g. 100 MW)30 MW25MWBidder 1Bidder 2Bidder 3Bidder 4AuctioneerBenefitsGrid-compatible RE development.Lower risks & costs of project development if adequate quality. ChallengesHigher admin. burden on government.Reduced role of bidders in finding optimal site.Risk of ‚faulty‘ site selection and preparation.BenefitsLower admin. burden on government.Site-specific risks mitigated through bidder-driven project development.ChallengesLower grid-compatible RE development in absence of locational signals.Higher risks & costs of project development if uncertainty about project costs and timeline.

11. Site selection and preparation: country examplesGovernment-site auctionBidder-site auctionBidder 1Bidder 2Bidder 3Bidder 4AuctioneerProject siteSelected & pre-developed15 MW30 MWProcured volume (e.g. 100 MW)30 MW25MWBidder 1Bidder 2Bidder 3Bidder 4AuctioneerCountry examples:Senegal’s Scaling SolarDubai/Abu Dhabi (UAE)MoroccoDenmark offshore windCountry examples:Tanzania onshore wind and solar procurementSouth Africa (with easier project development in Renewable Energy Development Zones - REDZ)Mexico, Chile

12. Ceiling prices control costs and generate market signals, but setting is a challengeSuccessful bidsUnsuccessful bidsVolumein MWPrice in Cent/kWhDefined volumeCeiling price(e.g. LCOE-based)Ceiling prices: relevance and calculationRelevance:Control over maximum costsCreate price signal for marketDisadvantage:Could signal lack of competitionCeiling difficult to set if little informationCalculation: LCOE + margin to cover bid riskIf applicable: previous feed-in tariffCash-flow model analysisAdapt based on experience12

13. Most countries disclose ceiling pricesSuccessful bidsUnsuccessful bidsVolumein MWPrice in Cent/kWhDefined volumeCeiling price(e.g. LCOE-based)Disclosing ceiling priceBenefits:Helps prevent projects from being rejected in the auction.Gives bidders more planning security (sunk costs).Disadvantages:Bids close to ceiling price if low competition13Undisclosed ceiling priceSouth Africa, Peru (rounds 1-3)Disclosed ceiling priceBrazil (combined with undisclosed auction volume), Mexico, India, Peru (round 4)Country examples

14. Technical requirements and financial guarantees ensure quality of projects in auctionPlanningApproval processConstruction OperationEarly auction:RfQ stageRfP stageTechnical: Sunk costsAll: Prohibitive barrier for (some) biddersTechnical: Selection of projects with sufficient progress in planning (ability to assess costs)Financial: Bidders with intention to realizeConditions for participationLate auction:RfQ stageRfP stageCountry examplesEthiopia (government-sited, 100MW) Bid bond: $3/kWCompletion bond: $15/kWZambia (government-sited, 2x50 MW)Bid bond: $26/kWCompletion bond: $300/kW ($15M per project)South Africa (bidder-sited)Bid bond: $8/kWCompletion bond: $16/kWProject realization

15. Penalties enforce project realization PlanningApproval processConstruction OperationRisk for bidders increasesProhibitive barrier for (some) bidders Incentive to realize due to penalties Deadlines and penaltiesConsiderationsPenalties imposed in case project is delayed or fails to comply with the requirements stated in the PPA contract.Examples of penalties:Execution of financial guarantees if:Signing of PPA is delayedProject delays or cancellationCancellation of the PPAExclusion of bidder and/or project from future rounds.Country examplesZambia: termination of PPA if longstop deadline missed.South Africa: Reduction of PPA duration by 2 days/1 day of delay. Termination of PPA if deadline missed > 180 days. No/delayed realization

16. ConclusionAuction needs to be tailored to local policy preferences, market maturity and institutional readinessAuctions provide most volume control and price reduction potential – but market needs to have sufficient competitionSite selection by government reduces bidder risk and eases grid integration but are more complex for the governmentRisk of underbidding and winners curse can be reduced through technical requirements and financial guarantees  bidders can better estimate cost covering bids and have incentive to realize (also learning from winner’s curse experiment)

17. Questions?