Have the prices from competitive auctions become the "new normal" prices for renewables?
Analysis from Renewables 2018
Only partly. It is true that the use of competitive auctions has accelerated cost reductions for some renewable technologies, notably solar PV, onshore wind and offshore wind, establishing price benchmarks that are recognised worldwide. However, these prices cannot be consistently followed, as each country and technology has different resource potentials, financing conditions and auction designs.
That said, overall trends show that recent bid prices for onshore wind and solar PV technologies for projects to be commissioned by 2023 range from USD 20 per megawatt hour (MWh) to USD 50/MWh. This corresponds to a 45-50% reduction in contract price for both technologies from 2017 to 2022/23; for offshore wind, the decline is almost two-thirds.
It must be noted, however, that these auction prices are based on just a small portion of the total capacity to be commissioned under competitively determined remuneration schemes in the main-case forecast, so average prices may change with the announcement of new auctions. In addition, announced contract prices need to be verified as project delivery schedules and final costs may differ.
Trends in regional average auction prices for solar PV and wind technologies reflect different tender designs and financing mechanisms in various countries. Asia (excluding China) and Latin America, led by India and Brazil, represent over half of auction-awarded capacity worldwide, influencing average prices for onshore wind and solar PV technology globally. High capacity factors, low-cost concessional financing and long-term government policies on auctions have been key factors in Brazil and Argentina’s highly successful auctions. In India, however, developers’ aggressive bidding strategies have resulted in tender cancellations or contract negotiations delaying some deployment.
In North America, Mexican green certificate and energy auctions have led to the lowest prices worldwide for both wind and PV technologies. These prices are, however, subject to hourly price adjustments, while additional revenues from merchant activities and bilateral PPAs may increase total project remuneration. In the Middle East, the sharp fall in contract price from 2016 to 2017/18 stems from solar PV projects in the United Arab Emirates, which underscores the impact of high resource availability and low-cost financing. Contract prices for China’s recently announced solar PV auctions remain above the global average, mainly because of the relatively high FITs still available at the time of bidding. Access to concessional financing and robust auction design were instrumental in achieving low prices in Sub-Saharan Africa, mainly in South Africa and Zambia.
Generation costs are expected to continue falling for solar and wind technologies over 2018‑23. Renewables 2018 expects offshore wind generation costs to decline over 40% in the next five years, followed by solar PV (25%) and onshore wind (6%). However, comparisons between levelised costs of energy (LCOEs) and auction prices remain an important challenge. Limited availability of information on contract-winning projects makes it difficult to state with certainty that these tender-determined prices are becoming the standard benchmarks for renewable generation costs.
There is little doubt that market competition in well-designed and transparent auction schemes is an effective trigger for significant cost reductions. This is demonstrated in the figure below, which compares FITs and auction-based projects commissioned in the same year in different countries and indicates cost reductions of 10-50%.
However, LCOEs generally tend to be higher than awarded auction prices, for three main reasons. First, auction prices may not always reflect full costs: for instance, grid connection costs are not included in offshore wind auctions in Europe (except in the United Kingdom), while they are fully included in this report’s LCOE calculations. In addition, contracts may include price escalation clauses or split tariffs, as well as other benefits such as financing terms or tax conditions.
Second, the utility-scale PV market is currently dominated by China, the United States and Japan, where average PV generation costs are relatively higher due to high FITs in China and Japan, and elevated financing, administrative and regulatory costs in the United States. Moreover, some developers’ aggressive bidding strategies to gain market shares could also widen the difference between LCOEs and announced bid prices.
Third, awarded auction prices currently reflect only a small portion of the market, including countries with exceptional resources and low financing costs – conditions that permit record-low prices. Average auction prices may rebound as auctions progressively cover the majority of new utility-scale installations worldwide.
Over the forecast period, more complex business models are expected to emerge, to complement fixed remuneration received through auctions with additional revenues from corporate PPAs, merchant activities or hybridisation with storage to provide firm capacity. This emerging trend is expected to make it even more difficult to compare auction prices with LCOEs.