My last guest blog (on the subject of storage and PV) was prompted by responding to a consultation, this one has been prompted by the Department of Energy and Climate Change (DECC) commissioning Grant Thornton and Pöyry to discover what lessons it ought to learn from the EMR experience so far. This blog is based on the Renewable Energy Association’s (REA) response to the solar questionnaire, which I had the pleasure of coordinating along with the chair of UK Solar, Tess Sundelin of Green Hedge.

Not having to give the message directly to DECC, meant we could be frank, and we had plenty to get our teeth into as questions ranged right across the EMR board. They covered FID-enabling, qualifying criteria, value for money, auction design – you name it.

I’m going to home in on just three aspects: one controversial and the subject of debate right now within the industry, the second a retrospective look at how we arrived with the current arrangements, and finally a look at where to go from here.

Number 1: Bid bonds

Question 11 asked if the qualification criteria for participation in the CfD allocation round were (among other things) sufficient to prevent speculative bidding. We raise the subject of bid bonds in our response, but before you read on, bear in mind that we are where we are. There is an extremely constrained budget in comparison with demand, plus many legacy projects which were hoping to commission under ROCs.

“Opinion on [the entry criteria] is somewhat divided. Under any normal circumstance, having grid and planning already in place is a very high requirement for participation. Coupled with the uncertainty of winning a contract, this is an extremely challenging prospect for all participants, especially SMEs. However, these are not normal circumstances. As there was no overlap between the RO and CfDs, there are many projects which had been developed in order to gain ROCs and have already secured grid access and have planning consent. For these much of the money has already been spent and will effectively be lost if a CfD is not gained. Some of these projects may be financially unviable, however their developers have nothing to lose in bidding very low and hoping that the clearing price achieved might just be sufficient to resurrect interest in an otherwise-certainly-dead project. It could be argued that the first auction may have seen such bidding behaviour.

“Therefore, given where we now are, there is not really any alternative to such high eligibility requirements. Should either land right, grid or planning requirements be relaxed, the likely effect is that unviable or speculative projects would enter and succeed in the auctions, thereby sterilising budget and likely depriving bona fide realisable projects from obtaining strike prices in their place. This would not be in developers’ interests either, as it would simply serve to make the auction outcome even more unpredictable, and thereby the investment of development capital even more risky.

“Indeed there may even be a case for increasing the eligibility requirement further, and introducing a bid bond. While there are mixed views on this among the REA’s UK Solar members, some are in support of this, in order to prevent speculative projects from being entered and gaming/tactical bidding strategies from being used. Therefore we propose that DECC investigates this and gives it due consideration.

“While bid-bonds would further challenge the SME sector, the alternative – undertaking project investment for an auction system not only subject to competition with ‘good’ projects, but also to the unpredictable competition with speculative or ‘dud’ projects and gaming or ill-informed bids – may be even worse. If used, bid bonds should be sized in a way that is not unreasonably onerous, but nevertheless sufficient to strongly disincentivise speculative bids. Something along the lines of the Capacity Market auction should be considered – though we note that £5,000/MW would most likely be too punitive and near-impossible for the solar SMEs to manage. Something like a minimum bond of £25,000 plus a top-up of £1,000/MW would be more appropriate.

“Once the backlog of legacy projects is no longer an issue, bid bonds may no longer be required.”

DECC had previously considered bid bonds as a means of providing incentive for contract signature and delivery, but decided against it because of negative feedback from developers, but noted “it is important to find ways to mitigate against this effect”.

As we know, two of the five solar projects that won CfDs did not sign them, suggesting that there is perhaps a need to consider this for future rounds.

Number 2: Competition – talking vs. burying head in sand

Here I give a candid reflection on how the wider renewables industry behaved in the years leading up to EMR’s introduction. The blame cannot be laid at solar’s door, as the concept of large-scale, cost-effective solar projects was barely on the horizon way back then.

The problem was that, as no one in the industry wanted competition, no one would talk about it. Perhaps because of this, DECC was coy on the subject. In early 2012 DECC was saying that auctions wouldn’t be introduced from the beginning of EMR, but that we’d “certainly see them by 2020 and possibly sooner”. The idea was that there would be allocation rounds, but that every project seeking a CfD in early allocation rounds would get one! It was obvious that this could not work, and the REA proposed first-come, first-served.

DECC then decided that some competition should be required from the outset, but definitely not for less developed technologies, which should be protected from it. (Read: offshore wind). To achieve this involved taking money from the cheaper technology pot, in order to make sure those projects had to compete, and putting it into the more expensive technology pot, to ensure those projects wouldn’t have to. That went completely contrary to idea of getting value for money, of course…

Finally, it became competition for all technologies, but grouped within ring-fenced pots. In any case new State Aid rules were on their way, which would have required competition for established technologies.

The all important question then became which pot a technology fell into. This mattered hugely for whatever technology was on the boundary in terms of price. Had solar been put in Pot 2, it would have been a very different story. Given it seemed inevitable (to me at least) that there would have to be competition from early on, I urged the entire renewables industry not to bury its head in the sand and refuse to countenance competition, but to engage and try and steer DECC in the right direction. I was pushing against a firmly closed door, however. I tried to be as persuasive as I could, without getting the sack. My blog of 10th May, 2012 might be an interesting read, when read with the benefit of hindsight.

I have always felt it best to divorce the question of technologies from that of principles, when considering support regimes. DECC tends to do the opposite. It used to stand by the principle of the ‘marginal technology’, but it dropped this when it didn’t yield the right answer. See my SPP blog of March 2012, when I asked “When might PV become the “marginal technology” – and what might that mean?”.

In my view it would have been better to have had competition from the outset, within technology bands, not between technologies or within groups of technologies. This would have given price discovery, and allowed DECC to deliver some technology diversity but to home in mainly on cost-effectiveness. However, back then I was also arguing for low entry criteria, with DECC handing out more CfDs than they expected to see commissioned, in the expectation that a good proportion would fail at planning or grid access. This is very much the approach that was taken in the 1990’s with the Non Fossil Fuel Obligation (NFFO). Not only would it have meant DECC didn’t need to set technology quotas or guide strike prices, but it would have been less discriminatory to SMEs and sidestepped the issue of sterilising capacity (as money set aside for non-commissioned projects would have gone back into the pot). However, DECC’s sensitivity about going over budget, triggered by the PV feed-in tariff situation and the legal challenges, meant this was a non-starter.

I now stop looking backward, and come to my final point, where do we go from here.

Number 3: Subordinating value for money to industrial policy

Solar is well on its way to becoming the cheapest form of new, low carbon electricity generation – it is already cheaper than new nuclear, new gas combined with CCS, and most other renewables, other than onshore wind (and should be getting there too within a couple of years). But the CfD regime as it stands only allocates less than a quarter of the available budget to the more cost effective technologies. There is a risk of investment hiatus in the large-scale solar market, meaning we risk losing the benefits of scale, momentum and innovation. With the solar panels themselves only making up about 35-40% of a project’s cost, these other benefits can play an important role in delivering reductions in development, financing, grid connection and balance of plant costs. It is these areas that hold the key to grid parity.

Any balanced low carbon energy policy needs to deliver a combination of cost effectiveness and an appropriate technology mix. Going forward, there must be a rebalancing between cost-effectiveness and industrial policy goals. Right now we have a halfway house – with all the challenges of a competitive auction, but without the full value for money benefits.

If competition is firmly here to stay, one must ask if it is best done between projects of the same technologies, within technology groups as we have now, or with all technologies in the same pot together. One mustn’t forget that it’s not just what-competes-with-what when the bids are in that matters. The rules on eligibility criteria, maxima and minima etc. can all influence the playing field.

Hopefully our response will provide DECC with some food for thought.

As ever, I welcome feedback on these blogs. I’m particularly keen to hear what developers think about bid bonds. Are they better than the alternative?

Finally, I haven’t forgotten that I promised more on the 5 + 5MW FIT projects, split asset projects with community ownership. REA made a recommendation via a discussion paper which was debated at a meeting of DNOs. I’m happy to share that paper with those that wish to see it, but right now how DNOs treat grid sharing requests is still work in progress.